How Banks Use 0% Balance Transfer To Trap You

This is an update to my post about Making Money Off Citibank MasterCard. The purpose of this post is to show how banks use these 0% balance transfer promotions to put you in the credit card trap. Banks are in the business to make money, not lose money by giving out zero interest loans. They have many tricks up their sleeves to tack on interest or fees to your account after giving you the freebie balance transfer.

While the credit card balance you transferred may incur 0% interest, many banks charge a fee for doing the transfer. In the case of the Citibank US MasterCard, that fee is 3% of the amount of each balance transfer, $5 minimum, $250 maximum. That means you need to make a greater than 3% return in order to come out a head.

Then there is credit protection insurance. For a “small fee” of $0.89 per $100 of average balance, this insurance will make your monthly minimum payment in the event of involuntary unemployment or disability. In the case of critical illness or death, the insurance will pay off your balance as long it’s not more than $10,000. Let’s see, this would cost me $89 per month if my balance is $10,000. The minimum payment on a $10,000 credit card balance is $200. However, if I pay $89 a month for this insurance, I can feel safe in knowing that should I become unemployed or disable, this insurance will pay that $200 for me! If you can afford $89 a month, surely you can afford $200. Credit protection insurance is by far the biggest rip off banks pull on unsuspecting consumers.

The next thing the banks will do is try to get you to charge new purchases on your card after you’ve done the 0% balance transfer. The reason they want you to make new purchases on the card is so they can charge their standard 18.9% interest on those purchases. The payments you make every month go to pay down the 0% balance transfer first. After the balance transfer amount is fully paid off, then you can pay off the purchased stuff, which have been accumulating interest during the entire 0% promotional period.

This is why there are so many 0% offers around holiday time. The banks are hoping you use the card to make those last minute purchases. It is also very common for the banks to raise your credit limit right after you do a balance transfer. They want you to use the card. Once you do, they’ve trapped you! The only way to make money on a 0% balance transfer deal is to pay absolutely no fees and not make a single charge on the card after the balance transfer is done.

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