Friday, December 14, 2007

Playing the 0% balance transfer game

It's hard to make it through a day without reading something online about 0% balance transfer offers from credit card issuers. Many bloggers have used these offers to make money using credit card arbitrage, wherein you take your interest-free loan and park it in an interest-earning vehicle until the 0% offer expires, at which point you "cash out" and take your interest winnings. Others use 0% offers to consolidate higher-rate debt, helping to accelerate their debt paydown.

From what I've read, these offers seem to be far more prevalent in the US than here in Canada. However, I've seen a lot of people talking about MBNA Canada's 0% promotional rate, and I thought I'd take a look at it. The offer is not listed on MBNA's website, but if you call a toll-free number and give a four-character promotional code (listed in the thread I've linked), they'll process an application for the card.

I called last night to apply for the card, and was approved on the phone. I was given a $15,000 limit, which I will use to consolidate a big chunk of my current revolving debt (which currently sits on my line of credit). This balance will sit on my MBNA card for 15 months, accruing $0 in interest (there's a one-time 1% fee for transferring the balance), which should save me over $1,000 in interest charges. This will really accelerate my debt paydown.

Obviously, transferring a substantial balance to a credit card is not without risks:
  • By opening a new credit account and running it up to 100% utilization, I'll be hurting my credit score. However, I don't plan to apply for any new credit within the next couple of years, so I'm willing to take this temporary hit.

  • If I miss a payment (or pay late) during the 15-month promotional period, then the interest rate will jump up to 19.99%. I'm not clear on whether this will be retroactive to the time I first transferred the balance, but either way, it's something to avoid. I need to keep a close eye on my payment schedule.

  • Similar to the point above, I need to make sure that I pay off the card balance (or at least transfer it back to my line of credit) before the promotional period ends. I'll be setting lots of automatic reminders to make sure I stay on top of this.

  • If I use the card at all for purchases, then those purchases will immediately start to revolve at a 17.9% interest rate, and will continue to do so for as long as there is a balance on the card (because payments are always applied to lowest-rate balances first). This doesn't affect me, as I will never use this card (or, in fact, even carry it in my wallet) for anything other than the initial balance transfer. However, it's an important point to recognize, as it's what MBNA is hoping I'll do.
These are the primary risks, as I see them. By recognizing them, and planning to mitigate them, I think the benefit of faster debt reduction still makes this plan worthwhile.

Have I missed anything? Has anyone else taken this approach, or used this card?


Anonymous said...

I have done a similar thing. I know you point out the 1% BT fee, but you should also include that this will go against your balance. so if you have $15g, then only transfer $14,850 which will give you a whole $1.50 left on the card. I assume some would do the whole amount then realize they are over their limit. Also, if you have an existing MBNA card, you can consolidate the old card with the new one and thus increase your limit. said...

I think it's a good read. You make some very good points. Thanks