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Wednesday, December 13, 2006

You Can't Beat The Credit Card Companies

Yesterday, I received a comment from someone who said,


I'm still making $10/day on credit cards.


This is the same detractor who repeatedly tries to convince me that he is smarter then the Credit Card companies.

Repeat after me: A credit card is not money. A credit card is not money. A credit card is not money. A credit card is not money.

If you don't have real money at your disposal, you don't have any business even thinking about anything but the most basic of needs. Again: A credit card is not money. As Dave Ramsey (and John Cummuta) says, don't spend (or invest) money you don't have.

The thing is you don't know what will happen tomorrow. You may think your paycheck will be available to you on your payday, but what happens if the company goes bankrupt between now and then. Or maybe the "mail" truck delivering the checks to your location wrecks (breaks down, gets stuck, etc), delaying the checks. Borrowing from so called free credit cards is risky. The credit cards aren't stupid, they can tell what you are doing and trying to pull the wool over their eyes will only make you a higher credit risk to them rather then a better.

Michael Clarke writes in This is Money,

The practice, where a customer draws the maximum amount on a 0% card to either put in a high interest account or to offset a mortgage, has been popular with sophisticated card users since 0% deals first became popular in early 2000.

At the end of the 0% introductory period, stoozers (British term: those who borrow at 0% then invest the borrowed funds) either withdraw the money from where it has been invested and use it to pay off the full credit card balance, or switch to a new 0% deal.

...One way card providers are stopping customers doing this is by preventing them from transferring money into current or savings accounts. While it is still possible to transfer balances between credit cards, most card providers can now recognise bank account numbers and stop transfers to current accounts.


They also recognize other credit card numbers, and while viewing your credit report, they will see a lot of balance transfers between credit card companies. Eventually, they will say, "hey this guy is jerking us around," or something to that affect and start denying his credit. The person that thinks they are smarter then the card companies will begin to see their credit score (FICO) to drop.

Be leery of anyone like this guy, that tells you that you can beat the credit card companies.
Posted by Kevin Surbaugh at 12/13/2006 06:44:00 AM
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10 comments:

  1. Dave Ramsey is wrong. Credit can be used as a tool as long as the user is responsible. 0% balance transfers work, and the credit card companies allow them to. Credit cards are just waiting for the moment the guy who does this screws up and misses a payment... but responsible people won't let that happen.

    Of course there might be a drop in your FICO score if you go overboard, but some people have little need for a perfect FICO score. The drop in these types of situations is temporary, anyway, and has to do with the opening of the credit card accounts over a short time period, number of accounts open, and only possibly transfers between cards.

    If you have an emergency fund already and have no need for a high FICO score in the short term, by all means, make money off the credit card companies (if you know what you're doing). You do have to be careful and make sure you understand the terms of the 0% transfer offer. But a responsbile person can completely handle 0% balance transfers. It's not recommended for everyone, but it is possible for someone to earn a fair amount of interest. In my opinion, it's a lot of work for little return, but not everyone shares that opinion.

    None of this has anything to do with a credit card "being" money. I don't understand that comment. A credit card is a piece of plastic... You don't give someone your credit card (to keep) in return for a product or service... of course a credit card isn't money.
    ReplyDelete
  2. some people think they can borrow at 0% on their credit cards and invest that money....they are acting like that credit card is money and that is what is being refered to in that statement.

    again never spend (or invest) money you don't have!
    ReplyDelete
  3. Flexo, why don't you just save cash and invest that? Same returns without the risk.

    http://debtfighters.blogspot.com/
    ReplyDelete
  4. hi, kevin.

    yes, $10/day continues. I have $74,000 at 0%. It's all in money market funds at 4.5%. You say I have no business earning $10/day? That makes it even sweeter! A 4.5% money market "investment" carries nearly zero risk. I am not relying on my paycheck... the money I earn from my job is separate from this money. To pay the monthly bills, I use a corporate money transfer that is part of most automatic check delivery agencies. Even if I die, the payments still happen automatically. You are right: The money must get paid back perfectly. The BillPay system through my bank has never missed a payment and it's done electronically, but that risk is still why I keep the assets in liquid form... so I could pay them all back tomorrow.

    Recently I was denied more credit. Well that's fine cuz I already have $74k in cash! If I paid it all off today, I'd have a fine credit score in two or three months. And actually I have no *real* need for credit. I just enjoy a small hobby and income.

    Your quote from Mr. Clarke has not been true in my experience. No lender has sought to prevent my xfer of funds. Also: xfers do not appear on credit reports. In fact, rate does not, either.

    Kevin, I got back into this because you said it was a bad idea. Since then I've earned about $500. I kind of think anyone can do this, but realistically one must be very organized, very conservative, and very experienced to succeed as I do with it. Essentially I'm a businessman... I'm not spending a penny of the money, and I'm not losing a penny to the banks. Not everyone has that level of fiscal discipline.
    ReplyDelete
  5. I have to disagree with the premise and the following statement "don't spend (or invest) money you don't have."

    The average home costs $170k in the US. Should someone not buy a home because they don't have 170k in cash?

    Should a high school graduate forgo college because he doesn't have 30k for tuition & books?

    Should you forgo medical treatment (even though you might die) because you don't have 10k for medical treatment?

    The whole "don't spend money you don't have" sounds pretty stupid when you start putting things into context.

    Credit cards ARE money - specifically it is BORROWED money just like you borrow to buy a house, go to college, get medical treatment, buy food, buy clothing, pay for shelter.

    The BAD things happen when you borrow MORE than you could ever reasonably pay back.

    I currently have BORROWED 56k (yes $56,000 at 0%) and earning (yes EARNING) 5% on that money. I will PAY BACK EVERY PENNY after my 0% APR period ends.

    From those borrowed funds of 56k, I will have CREATED $2800 in NEW money out of thin air. I will then use this money to either invest it further or on personal consumption.

    In either event I am helping the economy and creating new wealth by borrowing; I would be doing neither by leaving my credit card accounts dormant.
    ReplyDelete
  6. Flexo, I think Dave Ramsey often assumes that credit card users are irresponsible because, statistically, they are.

    Anyway, using credit cards for profit is fine, but it does carry some risk - mostly related to your own responsibility.
    ReplyDelete
  7. Trent, you're at the heart of it. I can earn this small income because the banks still earn their large one. I want everyone to succeed against them, foremost by living within their true means. Kevin and I agree 100% on that. Now let me tell you more: Actually in 2006 I incurred some debt (and spent some savings) to fully fund a 401(k), Roth IRA, and HSA, and use the deduction to convert a traditional IRA to Roth. I did it all within the 15% tax rate, and in actual fact speculated on equities (win some, lose some).

    I am tracking how much "pay-off-all-credits" power my 401(k) gives me, which is half its balance as a self-loan, limit $50,000. Obviously I'm planning against a universal default clause, which I assume to call the whole thing. I've used this credit muscle to achieve the above plan cheaply and cleanly. To back all this I'm earning a very sound income now, but strictly speaking, yes I'm using debt. Just very conservatively. Indeed, my interest in Kevin's blog empire began with our disagreement on the wisdom of debt at all. I also have a mortgage at $130,000 but it's 6% fixed and my house is stunning. Some debt can be justified. Just don't ever think it's free.
    ReplyDelete
  8. it sucks to write a thoughtful comment that you don't release. some day i'll stop coming around this joint.
    ReplyDelete
  9. what should i do with the money i've earned? should i burn it? should i send it to you? is it invisible money? do i have to tell the irs? (of course i do.) wake up and realize 4% is easy and risk-free to earn, so 0% is worth every penny. it's funny that i've been explaining this for months to you now, but you continue badgering me in top level posts, and more and more people try hard to communicate to you that what i'm saying is real. not for everyone, but very real.
    ReplyDelete
  10. You don't seem to understand the dangers. If you have the money then invest it, but never repeat NEVER invest borrowed money. Even Roger Shumaker a licesensed CSA and owner of Retirement & Tax Solutions (member NASD/SIPC)sad he would advise anyone he talked with against such a plan. The first words out of his mouth was that such a thing was to risky.

    You claim you have cash, so invest that cash in some good mutual funds and do not invest borrowed money...tht is what you call stupid.
    ReplyDelete

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