Beware, Traps Ahead

In Part I of this article on making free money from balance transfer offers, we looked at balance transfer offers and how some very smart credit card holders are making money from balance transfer arbitrage. Today we're going to take a look at some of the things that you have to watch out for in using this strategy. As I stated in Part I, this credit card strategy is not for everyone. If you slip up just one little bit in executing it, it could wind up costing you money instead of making you money. Here are some of the things you need to watch out for:

Whether or not the the convenience checks are treated as a cash advance or a balance transfer. Be very careful on this because, the credit card issuer may classify a check made payable to the card holder as a cash advance instead of a balance transfer. If the offer treats balance transfer checks made payable to you to be cash advances, toss it in the garbage. The high APR for cash advances will be too much of a hurdle to overcome for the arbitrage strategy to work the way we want it to.

Know which APR applies. Yes, the offer states 0% APR balance transfer, but that doesn't mean that its the same one for purchases (or for cash advances). You may find some 0% APR on purchases offers, which is great, but in most cases, there's a higher APR for purchases. Like I said before, outside of the default APR, the cash advance APR will be the highest. Be sure to use another credit card, like a cash rewards card, for your purchases. That way you get some cash back. Don't use your balance transfer card or any other credit card for cash advances.

Transaction fees for balance transfers and caps. These fees are spelled out in the terms & conditions of the offer and expressed as a certain percentage of the balance, as well as a minimum and a maximum dollar amount. The lower the fee, the better for you and no transfer fee is the best. Keep in mind that these fees reduce the amount of money you can make from this arbitrage play. For example, State Farm Bank will pay you 5.5% for depositing $30,000 with them in a high yield savings account, but the credit card company is charging you 3% in transaction fees on that $30,000 balance, leaving you with a net of 2.5%. The fees knocks out the excellent interest you're earning at the bank. Avoid offers that have no caps on the transaction fees.

Length of time for teaser rate. The promotional rate is usually good only for a limited period of time. For the purposes of maximizing the interest that can be earned, look for deals where the teaser rate is good for 12 to 15 months. Avoid the short term offers.

Oh, There's More

Beware of purchase requirements to maintain the low interest rate. Remember, in most instances the APR for purchases is different from, and usually higher than the APR for balance transfers. The balance transfer gets the teaser rate and any purchases get the higher interest rate. Any payments on that card are applied to the lowest interest balance first, then the meter starts running on the interest for any purchases made. That's why you should only use the balance transfer credit card for borrowing only. Also, be sure to make all payments on all debt on time! Most credit card companies, under the Universal Default Clause, can jack up the APR if they discover that you've paid any creditor late. Set up monthly payment reminders if you are prone to forget. Even better, set up automatic bill pays to make your payments. Speaking of payments, if you are depositing the borrowed funds into a high yield savings account, link it to a free checking account with the bank for the purpose of making the minimum payments. Most banks put a limit on the number of ACH withdrawals from high yield savings accounts and some major credit card issuers will flat out reject any payments from these accounts.