Zero interest cards are great tools for digging yourself out of debt quickly, as they offer 0% interest for up to 18 months. From consolidating your existing debt to minimizing future debt on large purchases, these cards can be extremely useful. So useful, in fact, that crafty consumers once found ways to make money off of them.
Before the recession, when interest rates on savings accounts and certificates of deposit (CDs) didn’t hover below 1% as they do today, people could put money that they transferred onto a 0% credit card into savings accounts, which yielded respectable returns. Here’s a look at how that process — called credit card arbitrage — worked and why it’s become a largely abandoned practice.
How it worked
People who had excellent credit scores and no debt could transfer large sums of money onto 0% interest cards. They would then deposit their balance transfer checks into what were once high-yielding savings accounts and/or CDs. In the meantime, they’d continue to make the minimum monthly payments on the 0% interest card. Assuming that they paid off the debt before the introductory period ended, they would come away with a nice profit since the interest rates on savings accounts tended to be higher than any transfer balance fees on the 0% cards.
Low rates, no rewards
Nowadays, many 0% credit cards have balance transfer fees of around 2% to 5% of the amount being transferred. With interest rates on savings accounts being as low as they are, it no longer makes sense to put money from a 0% card into savings. You might even end up losing money in the process because of the balance transfer fee.
Better ways to use a 0% interest card
Although you can no longer rely on 0% interest cards to replace your day job, these cards are still incredibly valuable. For example, you can transfer debt from a high-interest credit card onto a 0% card to buy yourself time to pay off the balance. If your credit score is strong enough, you might even qualify for a 0% card that doesn’t charge a balance transfer fee.
Additionally, if you’re thinking about buying something expensive, doing so using a 0% interest card will give you plenty of time to make good on your purchase without having to accrue tons of interest.
Putting money from a 0% credit card into a savings account won’t reap the same rewards that it once did. With interest rates as low as they are, you’d be much better off playing it safe and using your 0% card to pay off existing or future debt.
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