App-o-Rama - Long-Term 0% Balance Transfer Strategy

As I struggle to read through the plethora of material on the forum at FatWallet Finance (FWF) regarding 0% Balance Transfer (BT) Credit Card Arbitrage I am trying to come up with the strategy I wish to employ.

The primary strategy employed appears to be to apply for every card that gives a sign-up bonus or 0% BT. Then maxing out the BT to 90% (or more) of the card limit, putting the cash into an online savings account that pays between 4% and 5%, all the while making minimum payments on the cards until the BT period is up and you pay back the card from the savings account. Then it is time to wash, rinse, and repeat.

A big problem this method, as pointed out by DaveHanson on the FWF, is that it undervalues your ‘credit score’:

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!

Instead of only considering the money you can make over the next 6 to 18 months, he recommends you take into consideration the money you can make if you are able to continuing doing this, as he has, for years. Treat it like a business. Every time you apply for a credit card you are taking a ‘hit’ and in a sense are ’selling’ a portion of your credit score.

For example, I might be able to choose between a $75 sign-up 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.

This is not to say you should never ’sell’ your credit score, some deals are too good to pass up, but your credit score is worth more than a free t-shirt with every new application. It is true that the app-o-rama minimizes the consequences of multiple credit applications application hits on your credit score, but it does not remove them entirely. Why not minimize the damage and, if you plan on using BT arbitrage as a second income, use the app-o-rama strategically?

My current plan is to do an App-o-Rama and max out the BT offers from each card. Then, following a strategy DaveHanson lined out, I will repay each card so that I have just under 50% of the card’s credit limit (CL) outstanding before the last day of the card’s billing cycle. Doing this allows me to ask for the max CL when I apply for a card but keeps this high utilization from ever showing on my credit report. Keeping the CL utilization below 50% protects my credit score which will help me not only get more 0% BT credit cards in the future but might also prompt my existing credit cards to send me more 0% BT offers.

Each month I will pay the minimum payment rounded up to nice $5 increment. This hopefully will keep me off any ‘only makes the minimum payment’ credit-looser list, and will make it real obvious if some stray interest or other charge gets applied to my card.

Too much today rides on our credit score to let it tank just for a short-term reward, especially when the potential long-term return is so much greater. The old, stock market adage is “Bulls make money, bears make money, pigs get slaughtered.” Pigs are the high-risk investors looking for the big score. I am in this for the long term and so will treat this just like I do with my other investments. I am, in a sense, investing my credit score and I don’t want to risk the principal at too much.

I am going to stay conservative here at the start, but in the future I might consider paying the BT down to 50% in stages rather than all at once, first down to under 70% (before the first billing cycle closes), then to 60% and then 50%. I don’t want to do this now, while starting out, because I don’t want to have 5+ cards with 70% utilization, but once the BTs age then I am not worried about having one or two cards at the higher utilization for a short period.

Strategy Summary

1. Individual Card Utilization < 50% at statement closings
2. Overall Utilization < 50% - a given if I am able to do #1
3. Pay slightly more than the minimum each month

Pros:

1. Keeps credit score higher
2. Keeps possibility open for BT offers from existing cards

Cons:

1. Less money up front