 Zero-percent
convenience checks: reward, risk
|
 Dear
Dr. Don,
I frequently get offers from my credit card providers for zero-percent
interest on convenience checks for several months. So, I write checks
up to my credit limit, deposit them into high-rate MMAs at 5 percent
plus and set up automatic payments to pay off the balances when
the low interest offer expires. After the cash-advance fee, I'm
still netting over 4 percent on the bank's money. If I stay on top
of the payments, do you see any downside to this? It's nice to turn
the tables on the credit card companies for a change! Thanks in
advance.
-- DIY Banker
 Dear
Banker,
Investing borrowed funds at a higher, guaranteed return than the
interest expense or cost of funds provides you with a virtually
risk-free profit. You have to be able to follow the rules of the
offer and not get tripped up in the fine print on the credit agreement
to make this work. You seem to be successful at it. I don't see
any downside to the practice.
What I like to keep in the back of my mind is that
credit card companies have a cost of funds at or above the targeted
federal funds rate. That rate is currently 5.25 percent. When they
lend you money at zero percent, they expect to get something out
of the deal. While you're taking advantage of their offer, they're
looking to build a client relationship and make some money off your
business in the future.
Since you're not chasing these offers by taking on
new cards, but rather just using convenience checks on existing
accounts, you're not building a list of credit card accounts on
your credit report. While high balances on existing cards can limit
your ability to get new credit, you should be able to anticipate
the need for that credit and modify your outstanding balances accordingly
to qualify for that new credit.
To ask a question of Dr. Don, go to the "Ask
the Experts" page and select one of these topics: "financing
a home," "saving & investing" or "money."
|
