Take Advantage of 0% Credit Cards

This is a not my traditional rant, but more of a how to for the new economy. In particular how to take advantage of 0% credit card offers to significantly pay down your personal debt. It's legal, requires a little leg work to get set up and can save you boatloads of cash over the long haul. It may be obvious to some, but not to others and I've got the procedure down to a science.

If you're like me, you been getting oodles of offers for 0% credit cards. Believe it or not, they are for real. They allow you to finance large sums of money for free. The gotcha is that the rate only lasts for a certain period of time and they start to charge you their ridiculous standard rates after that. If you are cocky, you can beat them at their own game and let them pay your finance charges for a while, coming out ahead in the long run.

To play this little game, you need a few things. First, you need to have good credit. The better it is, the better and longer you can play. Second, you need to be methodical about paying bills. Even if you have good credit, you need to make sure you pay on time to avoid late fees that will wreck this entire strategy. Third, you need a good secure line of credit that is liquid and doesn't charge balance transfer fees. A Home Equity Line of Credit (HELOC) is ideal for this type of strategy.

OK. If you fit the bill he we go. The trick is very simple. You move all your high interest loans (X% loans) onto 0% credit cards. WOW! Anyone could have though if that. Yea, but there are a few road bumps to make it truly safe, secure and worth your time.

Let me describe my setup, which I think is ideal. I have a checking account and HELOC through my bank. My HELOC is at prime rate. I am running Quicken, which has online access to both accounts allowing downloading, transfer AND bill pay. You don't need this type of online access, but it makes things MUCH easier to manage.

BTW, let me state for the record: If you own a home, get a HELOC. Even if you don't need it now. It is a flexible line of credit that can allow you to access interest rates that only the big boys can get. Banks are eager for your business and will pay the closing costs and most nowdays let you have credit card access to the account. If used responsibly, a HELOC is a financial tool that allows you options when making a purchasing decision. It also can save your arse if you get in a crunch. (FYI, I'm not affiliated with a bank or anything like that)

You take several loans, of a moderate interest rate (Auto, Student Loan, Appliances, Furniture) and began transferring the balances to the 0% credit card offers you receive in the mail. A few gotchas about the cards. You need to apply only for cards that have 0% interest for 6 months or longer and DO NOT have a percentage balance transfer fees. Shorter than 6 months probably isn't worth your time. Many cards have a promotional items where the fee is waived for an initial balance transfer. This is fine. Also, some have a capped rate, usually $40 or so. These are ok, but free ones are out there so shop around.

So you start transferring the loans to the cards. The next step is where the software comes in handy. SET UP A SCHEDULED PAYMENT FOR ANY 0% CARD! I cannot stress this enough. Figure out your minimum payment and make sure that the system makes that payment every month, no matter what. Most if not all of the cards have penalties that kick in if you are late for single payment. One of the nastiest is that the 0% rate ends! DON'T BE LATE, EVER!.

Ok, you're making payments at 0%. Congratulations! Now the ideal situation would be for you to transfer all loans onto 0% cards, excluding your mortgage. (more on that later). If you have, then pay as normal. However, if you have any X% loans left over, you need to make a few decisions. First, figure up all the required payments you were making on your X% loans. Second, subtract your minimum payments on your 0% cards. The resulting figure is the optimal amount to pay on your remaining X% loans. If you have a decision to make between to remaining loans, payoff the one with a higher rate first, even if the other one is almost zero. Quicken has a nice debt reduction calculator for figuring out which loans to pay off first, but it get tripped up factoring in limited term 0% rates and such.

Now that you've been making payments for a couple of months, it's time to plan your exit strategy. Look ahead to a couple months before the end of your rate and start applying for a new card. Make sure you give enough lead time (6 weeks) to allow for the processing of the application. IMPORTANT NOTE: Most credit card companies WILL NOT transfer balances from their own cards! Why? You're already their customer. The intro rate is to get new business. Try again.

You may need to several different companies to make sure one come through by the time the current card rate expires. From a credit report standpoint your better off with cards that have longer introductory periods. You wont be swapping cards as often. Also, don't be afraid to be BOLD about your income. More income means more credit which is more money saved.

As a failsafe, setup a note in your financial software, in Outlook or any other type of reminder program to notify you A MONTH BEFORE THE INTRODUCTORY RATE ENDS. Why? Because the credit card company aint gonna tell you. They want you to carry that balance until you die, making interest payments until then. Its up to you.

So you've been going pretty good, but the credit offers are just drying up. Ok, now time to go into hibernation. A couple of weeks before the end of the 0% rates, start transferring the balances to your HELOC. This will make sure you don't get zapped by the credit card Co's real rate. The HELOC is your safety net. If anything goes wrong with a card or rate, just move the balance. The key to using it properly is to NEVER BORROW MORE ON 0% THAN THE HELOC CAN HANDLE! If you follow this rule, you will never be left out to dry. Once the balance is transferred, start looking for new sources of 0% to start the cycle over again.

Now, on the question of your mortgage. As played above, the 0% trick works pretty good with short term balances. However, twiddling with you mortgage requires some thought. I would only suggest that you transfer your mortgage balance in small chunks that your HELOC can digest. Currently, the prime is below what most people financed their properties for, so it makes since even under the worst case scenario. Just be careful with your house!