Making Money with Credit Cards
Remember back on the first page, we said that carrying credit card debt was a bad idea in most cases? Now we’re going to talk about the exception – how you can actually make money using your credit cards.
The credit card market is very competitive – there are a lot of places to get a card, and if you have a good credit rating, everyone wants your business. So much so, in fact, that many companies will give you a 0% interest rate for an entire year, just for signing up for their card!
Now, a 0% interest rate doesn’t exactly mean free money – you still have to make your monthly payments, and at the end of the year you get their normal interest rate. For that year, though, you basically have a zero interest loan. It’s possible to take advantage of that.
When you look at a credit card offer, note that there will generally be three promotional interest rates listed: one for purchases, one for balance transfers, and one for cash advances. What you want is a credit card which offers a 0% rate on balance transfers for a year or more.
Now, here’s the catch: almost every company charges a 3% balance transfer fee (I’ll mention an exception below). However – and this is not true of every company, so read carefully – most of them cap the fee at $75, which is 3% of $2500. In other words, if you borrow $7500, you pay only 1%. If you borrow $15,000, you pay half a percent. Not bad at all, considering many banks are currently paying over 5% interest!
By now you can see where this is going. For example, I opened a new credit card with a $15,100 limit. I took out a $15,000 balance transfer and paid a $75 fee, so the balance on that card is $15,075, $25 below the limit. (Note that getting so close to the limit will lower your credit score slightly) I put $10,000 of that money in a bank account that is currently earning 6% annual interest, which means that over the next year, while I use the $5,000 to make payments, the $10,000 (assuming the interest rate stays constant) will make me $600 in interest – not a bad return on that $75 fee!
A few things to watch out for:
- Make sure you get a balance transfer and not a cash advance – the cash advance rate is generally very high.
- Be sure you pay off all of your credit cards on time every month. Credit card companies generally include language allowing them to jack up your rates if you miss a payment, even to another company.
- Be sure that the card you’re applying for caps the balance transfer fee (or doesn’t have one).
There are several ways to get the balance transfer money into your bank account. The easiest, if the credit card company allows it, is to just do a balance transfer directly to your bank account; I was able to do this with Discover, but not with Chase. Another is to transfer to a second card, then ask that company to send you a check. If you take this method, don’t transfer to American Express – they really don’t like it.
Didn't get a high enough limit? Here's one trick: if you already had a card with the same company (two Chase cards, for example) they'll be happy to move some of the available credit from your old card to your new card. In fact, if you request a balance transfer with your application and your new credit limit is not enough to cover the requested transfer, they may even suggest it themselves.
To get you started, here are a few decent cards you might want to apply for. If you’re relatively young, you’ll probably only be able to get a few moderate-limit cards, but if you have an established credit history and are able to get high credit limits, be sure to read the next section: the App-O-Rama
Card #1: Discover Platinum
Remember I said that one card didn't charge me any fees? This is the one. I applied for the card, was approved, filled out an online form, and my full credit limit was sent to my bank account, with 0% interest for over a year.
Don't want the flag card? You can see a variety of Discover cards here.
Card #2: Chase Platinum Visa
Another good card, they charge 3% up to $75 for balance transfers. Again, be careful you're getting a balance transfer and not a cash advance; while the balance transfer rate is 0%, the cash advance rate is over 24%, and the fee is uncapped. Want to see more Chase cards? Click here.
