Banks Will Loan You Free Money, But Be Careful!
By Chip Parker, Jacksonville Bankruptcy Attorney on Jun 13, 2007 in Florida, General Bankruptcy Information
In my line of work as a bankruptcy attorney, I have grown to distrust credit card companies. I never opened those teaser envelopes with offers of cheap credit. I used only one card, and I paid it off every month. I married a certified public accountant a couple of years ago, and I have been opening credit card offers ever since. You see, she is a credit card guru, and what I am about to tell you is not for the squeamish or amateurs: credit card companies pay me to borrow money.
In an article for Bankrate.com, Gregory Taggart describes how the Zero Percent Balance Transfer Game works: A credit card company offers a 0% balance transfer for a period of time, typically six months to a year. There is a balance transfer fee, typically no greater than $50 - $75, and a required minimum monthly payment. If the borrower misses a payment or fails to payoff the entire balance before the end of the no-interest period, the entire balance accrues interest from the date of the transfer at the default rate of interest, typically 29%. The bank is clearly rooting against the borrower, since that is the only way it will make any money.
This “game” is a variation of the classic game theory of “chicken,” wherein two cars speed directly at each other. If one driver swerves, he yields the road to his opponent, but if neither driver swerves, they face mutual calamity. If the borrower fails to pay in accordance with the very strict rules, the lender wins the default interest money. If the borrower abides by the rules, he wins the interest earned on the “free money.” If an unforeseen financial circumstance occurs that makes repayment of the loan impossible, the borrower could wind up in bankruptcy and the lender may lose the original loan amount – mutual calamity.
My wife and I have been playing this classic game of with the major credit card companies for more than two years now, and so far, we’re winning. However, there are a few factors that put the odds in our favor:
1. We both have very stable jobs.
2. As a “safety net”, she and I have a home equity line of credit that exceeds the outstanding balance on our credit cards.
3. We are fiscally disciplined (not miserly, just disciplined).
4. We use our bank’s automatic bill paying software to ensure that all payments are made on time.
Even for us, there is the inherent risk that an unforeseen circumstance will put us in a financial pickle, but so far, we’ve earned thousands of dollars on the “free money” from the banks. Unfortunately, most consumers are drawn into the credit card balance transfer game out of necessity. After all, banks would not make these offers if most consumers succeeded in paying off the money before the end of the no interest period. Ironically, this makes the risk of “mutual calamity” high, since consumers that “need” the balance transfer are already in financial difficulty.
The bottom line is that the balance transfer game should not be ignored but approached cautiously. Remember, there is no such thing as a sure bet, and this game of chicken is not for the faint of heart.
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