Thread rationale

It seems it's time for a consolidated thread discussing the use of credit line promotional rates to make money. There have been many, many threads here on FW and elsewhere over the years that touched on this subject. Please help increase the value of this thread by adding other pertinent links to it, and I will try to keep the OP updated. Meanwhile, I'll keep this post largely factual, and keep my own opinions on "best practices" for the following post.


Background info

For many years, credit card companies have enticed customers to either open new accounts, or rev up usage on their existing accounts, by offering promotions that allow for borrowing their money at much lower interest rates than their standard agreements allow for. Since FW's inception and earlier, many FW members have used various means to profit from these offers. In recent years, as more have tried these strategies and CC companies have become more automated (and often more sophisticated), there has been a dramatic increase in reported problems with these strategies.


Credit line arbitrage: the "standard FWF technique".

The most commonly cited FWF strategy works roughly as follows:

Step 1: Receive an offer of (for example) 0% on BTs for one year from a $25K Chase line, with a $50 BT fee.

Step 2: Transfer all or almost all of the card's credit limit into a bank account (when available as on option), or to another credit card account (some offers require this). Some ways people have accomplished this step are detailed here .

Step 3: Stash that money in a safe investment, earning returns for the duration of the promotion.

Step 4: Pay the minimum monthly payments for 12 months (generally 2-3%).

Step 5: When the promo period ends, pay off the remaining balance with proceeds from the investment, leaving yourself with $0 balance on the card.


This basic strategy can then be repeated with other cards, the same cards, or even with multiple cards simultaneously. Some things to note about this approach:

-It ignores effects on one's credit score, or other reactions from lenders. In my opinion, this is a mistake. Nevertheless, some have managed to do this for years without adverse consequences.

-It assumes that the promotional rate is available for a limited time. Most very low offers are, but some are not.

-It assumes a fee for doing the transfer. It used to be that many BT offers didn't require a fee, now most do. (Also, the amount of the fees has increased notably in the last year, often going as high as $75.) If there is no fee, then there's no real incentive to do one big BT--splitting them up works well too.

-BT cards should ALMOST ALWAYS be segregated from cards used for purchases, UNLESS the terms of the BT require otherwise (in which case purchases should be for amounts as small as possible). The main reason is that once you're carrying a balance, purchases have no "grace period"--meaning that you're paying the purchase rate from the moment you buy anything. Even worse, the payments you make always go towards the lowest rate first. That means that if you have a 0% offer, and buy a $1,000 item at the purchase rate of 12%, then you'll keep paying $10 per month to finance that purchase until the ENTIRE BT is paid off. There are a few exceptions, as manuel notes below, but these are rare.

-The promo rate offers require that strict conditions might be maintained. In particular, late payments on the card, OR EVEN ANOTHER ACCOUNT, can cause the rate to be "jacked" up to 30% immediately. Anyone who isn't very careful to adhere to ALL these conditions is asking for major hassles.

-It assumes that the funds are invested in something ABSOLUTELY SAFE. If a payment is missed, the rate gets jacked, etc. funds should be readily available to pay it off.


Variations on the "standard technique"

There are MANY different variations on the standard technique. I will list just two options to start, and we can add more as the thread grows.

-Partial utilization/"Rollling maximization" strategies. The standard technique simply maxes out a credit line, and pays off the minimum each month after. This variation uses only a fraction of the line--generally 50% or less--OR pays off the FULL balance before the close of each billing cycle, only to draw it up again immediately after the cycle closes. The main reason for this variation it to keep one's credit score from tanking (it will ALWAYS drop, and often significantly, if one has a line report to the credit bureaus showing more than 50% of their available balance being used), and/or to keep a lender from getting nervous about "high risk activities."

-Coupling BTs with a HELOC or other LOC. The standard technique pulls cash from the CC companies, then parks it in some investment (money market, short-term CD, etc.) until the money is due back to the line issuer. This variation takes a line of credit, typically a equity LOC secured by the home, and uses BT money to pay down that line. When the money is due back to the CC company, the HELOC is simply drawn back up again to pay it off. In so doing, a standard competitive HELOC with, say, a prime -.5% rate would effectively yield 5.5%, a much higher rate than short-term money markets would yield. At the same time, one can more easily pay off the balance, simply by drawing on the LOC. For more on HELOCs and how they can be used, see this thread and its links, and this well done website.


Increasing credit (and goosing returns!) via the credit "Application Spree" / AOR / "App-O-Rama"

At least since the 1990s, several FWF members have bundled credit applications together so as to maximize the prospects for greater credit on better terms while containing associated damage to our credit profiles. In 2004, FWF member SUCKISSTAPLES coined the phrase "Application-O-Rama" to describe his own version of such a strategy. Since then, references like "AOR" and "App-O-Rama" have entered the FW lexicon, loosely describing various implementations and usages of this technique.

The core idea is to pick a time when's one credit score and profile are relatively good, and then apply for many new credit lines and/or line increaes all at the same time, so that the creditors will all see the "good" profile (before many credit "inquries", larger credit utilization, etc. does its damage), and accordingly award high line limits and generous promo terms.

While there are many reasons one might want to persue an AOR, the rationale that seemed to capture the imagination of most FWF members was to enhance the exploitation of low- or no-interest BT offers. Note that here at fatwallet, the term "AOR" is commonly confused with credit arbitrage / investing promotional rate money. THESE ARE ENTIRELY DIFFERENT IDEAS.

Having tried to lay out the basics in my OP, here are some more subjective thoughts based on my own experiences and observations.

(A word on my own situation, to help readers judge my POV. I've been investing with BTs since the mid-90s, and have done heavily since about 2002. I currently float an average of between $5-600,000 of debt on CCs and LOCs, which is all debt generated by purchasing income-producing real estate. For more insight into my own goals and techniques, see this currently archived thread.)

Be VERY CAREFUL to make sure you make ALL required payments. Using CC promos can be a powerful tool, but the whole enterprise can come crashing down VERY quickly if any mistakes are made. In particular, make sure you have a system for getting ALL your minimum payments to EVERYONE in a TIMELY fashion. The easiest and probably best way to do this is with an automated billpay system, which allows you to "set and forget" monthly payments in advance, and have them made electronically at the appropriate time.

Don't undervalue your credit. The current conventional wisdom at FW seems to be that credit scores aren't any big deal. It is true that IF the above rule is followed, so that no payments are ever late, then much of the damage that can be done to credit profiles by using 0% money is reversible in fairly short order. But after an increase in the influence of credit profiles in recent years, yours is ABSOLUTELY CRUCIAL for reasons that go well beyond the traditional ones, like getting a good mortgage rate. A credit profile can determine whether you get a job, what insurance rates you get, what mortgage rates you qualify for, what student loans you can get, generally what hot financial deals you're targeted for, and of course, what other tasty CC offers you receive. So, it is FOOLISH to put it at risk for the sake of a few extra BT $. If in doubt, don't risk messing with your credit profile!

Take the long view. Many make the mistake of thinking only about their credit profile, BT options, etc. over the next 6-18 months. But this discounts the fact that this game can be played for the long haul--and, if one if careful, for progressively greater stakes. For example, I might be able to choose between a $75 signup bonus, and keeping enough inquiries & new lines off of my report to take an existing $20K line and double it to $40K. While that $40K line may not make me any money today, it might very well bring with it a great offer next year (say 0% for 12 months.) By setting myself up now to prepare for these options, I can save FAR more by using this extra line flexibility next year than I might by "selling" my credit for a relative pittance. Note I'm NOT saying don't ever sell your credit. Even though my credit earns me four figures every month, I'll still bite for an exceptional deal (like the Universal laptop deal from a couple years back.) But one should measure twice and cut once on this stuff, IMO.

Consider "rolling" and "partial" strategies. A stock market cliche is, "bulls make money and bears make money, but pigs get slaughtered." In this BT game, pigs are increasingly getting slaughtered too. The two most recent detailed AOR threads at FW--linked above in the OP--show just how much havoc even carefully planned AORs can wreak. My own view--which is grounded in years of observation and millions in BTs--is that by more cautiously and conservatively managing one's BT investments, most of these problems can be avoided. Chief among these is to keep OVERALL AND INDIVIDUAL credit utilization, AS REPORTED TO THE CRAs at reasonable levels--the lower, the better. In particular, I almost never carry >50% on any one line for any length of time, and I roll BT offers over between credit cycles wherever possible. Thus far (knock on wood), I've had no problems with BT investments.

I've found alot of really helpful info on FWF to help me understand this stuff and decide whether it's something I want to do or not. Since it has taken me a while to dig this stuff up, I thought I should copy it here so other people don't have to dig like I have.

Credit to "DaveHansen" and others on FWF, not to me.




original thread on FWF