Has my friend found a way to make free money?

June 15, 2008 1:07 PM

Has my friend found a way to make free money?

My friend thinks he has found a loophole in using credit cards and never paying them off...

He gets two credit cards. He buys something on Credit Card A for $500. He then pays off Credit Card A (in full) using Credit Card B. When Credit Card B comes due, he pays it off with Credit Card A. When Credit Card A comes due again, he pays it off with Credit B. And so, forever. Since both credit cards have automatic payment systems that you can setup, this is all done for him. And since he is paying off the full amount each month for each card, he never builds interest.

This sounds pretty brilliant, but I know there has to be something wrong with this idea. He's already done this once, but plans on doing it again with more credit cards. What are we missing here?

posted by JPowers to work & money (25 comments total)

Well, he still owes the amount of money he's racked up on the card, so it's not like it's fee, as such. He may wish to check the fine print to ensure he doesn't have a minimum payment, either.
posted by rodgerd at 1:12 PM on June 15, 2008

s/fee/free/
posted by rodgerd at 1:13 PM on June 15, 2008

I could be wrong, but I believe this considered a balance transfer (rather than a purchase) and there's usually a % fee charged for balance transfers.
posted by sharkfu at 1:13 PM on June 15, 2008 [1 favorite]

Paying a bill with a credit card is often treated as a cash advance, and so costs extra. WAY extra. Some credit cards charge daily interest on cash advances, so he will accrue interest.
posted by arcticwoman at 1:14 PM on June 15, 2008

He's forgetting about credit card limits, too. If a card has a $10,000 limit, that's only 20 months of accruing $500 in spending per month.
posted by xo at 1:16 PM on June 15, 2008

That his credit will most likely get shot. There's also card limits. Eventually he'll hit that.

I have no doubt that the credit card companies have thought about this already and have some sort of safeguard in place.

I also remember seeing this on The Nanny way back in the day. It was a joke then, But I'll be some people tried it.

In short, try to talk him out of it. I'm not a lawyer, but there's no way his thinking can be right.
posted by theichibun at 1:16 PM on June 15, 2008

You're still building up debt, so you're not making free money — you're just getting a zero-interest loan.

My credit cards' fees are structured to prevent this: a payment of a sort that can be used to pay off another card starts incurring finance charges immediately, without the 30-day grace period for "purchases". I guess your friend has found a way to avoid this?
posted by hattifattener at 1:17 PM on June 15, 2008

Most credit cards have a balance transfer fee of about 3%.
posted by delmoi at 1:22 PM on June 15, 2008

He is not "making free money." He is taking out a second, short-term, interest-free loan in order to cover an initial short-term, interest-free loan. In other words, he's borrowing from Peter to pay Paul. While he figure out a way to make this work in the short term, the principal is never going away.

Assuming he does everything in how power perfectly (which is a heck of an assumption, actually), there are many ways he can still trip up.

* Banks can change their rules and payment calendars at will. Banks can also detect abuse and close accounts off from future purchases. Look closely at the banks involved -- very often, people will carry multiple cards from different divisions of the same institution and not even know it. This makes detecting abuse easier for the bank.

* Banks usually charge higher interest rates for non-retail purchases (such as issuing payments or checks to other credit accounts), so if you trip up, it'll hurt worse.

* He would be carrying a constant load of debt, which harms his credit score. There is an added risk that, if he uses this scheme for quite some time and then something goes awry, he could be hit with a very large principal all at once.
posted by Cool Papa Bell at 1:25 PM on June 15, 2008

It would be more like a 0% interest loan, than free money; but this is beside the point that it clearly won't work this way.

My experience has been that you can't pay a credit card with another credit card without it being treated as a cash advance. This has a fee and no grace period (ie interest starts accumulating from day 1).

Usually, merchants have to pay a percentage of the transaction in order to accept payment via your credit card. This lets the credit card issuer grant you some interest-free time without actually losing money. Credit card companies aren't going to pay this fee in order to let you pay your card off with a competitor's card.

So, in the somewhat conflicted OP, I'm behind your friend "thinks he has found a loophole" more than "he's already done this once".
posted by Bokononist at 1:27 PM on June 15, 2008

Paying off one credit card with another credit card is considered a balance transfer and almost every credit card issuer charges interest until that debt is paid. He is not making free money, he's just possibly avoiding interest - he's still building up debt which he'll eventually have to pay and if the card issuer finds out, they will wreak havoc on his credit score.

Tell "your friend" (wink) to stop trying to cheat the system and live responsibly.
posted by cgomez at 1:28 PM on June 15, 2008

You cannot simply charge a credit card bill to another credit card. The only way to pay off a credit card with another card is with a cash advance or a balance transfer. You will find (with the very rare exception of certain fee-waived one-time balance transfer deals, but these are very much the exception and would only work once) that these types of transaction involve an up-front fee, that is they immediately charge X% and add it to your bill.
posted by nanojath at 1:29 PM on June 15, 2008

It's a fool's game.
posted by Burhanistan at 1:34 PM on June 15, 2008

This is called kiting. It was very common with checking accounts back in the day when it took days or weeks for cheques to clear. The United States has been doing this with their entire economy since the early seventies.

Most likely for this to work for him, he'll have to keep opening cards with different banks so he doesn't have to pay a percentage. Eventually he will not likely get approval for these types of cards, even if he is "pre-approved" and the whole scheme will tumble. It will conceivable work in the short term, though.
posted by Yorrick at 1:39 PM on June 15, 2008

nothing good will come of this.

the bills will come due, most likely unexpectedly. I've gotten (and used) the offer of transferring my balance onto a new card, but you cannot count on that forever. Also, signing up for a dozen credit cards quickly is a red flag on your credit rating, I believe. They'll come offering yet more, because the card that gets the ultimate balance spent through this method is going to be the ultimate winner.

The asshats in DC operate under the delusion of never having to pay the bill.
don't emulate them, friend.
posted by Busithoth at 1:43 PM on June 15, 2008

To add to what others have said, since this could only be paid with a balance transfer or a cash advance, I guarantee that your friend is not getting 'grace' on the transactions, which means interest starts accruing on that amount from the moment the BT or cash advance is made, and at hefty interest rates. It doesn't matter if he pays it off 'on time', because the interest has already accrued -- not to mention any additional fees he is likely to be charged with.
posted by mattholomew at 2:22 PM on June 15, 2008

This is a very common practice (but not quite as you described) but it can only last so long, eventually he will run out of cards. Generally what you do is wrack up credit on your card then get another new card and take advantage of the 0% on balance transfers for x months (usually 6-18 months) when the 0% offer ends you get a new card on the same deal ...etc

I guess you could consider it free money since you don't pay interest on that amount and if you had the same amount in a saving account you could be making 3-5% per year on that same amount.

But bouncing between the same 2 cards wouldn't work.
posted by missmagenta at 2:55 PM on June 15, 2008

FWIW, I've got around $5000 still on a 3%-for-life Citibank card that I can't be arsed to pay off.

This balance started from a 0% balance transfer from BofA in 2004, which came from a 0% balance transfer from Citibank in 2003.

It was easier doing these CC games in the days of no-fee 0% balance transfer offers. These days, everyone is adding 3% no-limit up-front fees that kill the idea dead.
posted by tachikaze at 3:46 PM on June 15, 2008

This is known as "surfing". He ain't the first one to discover it.
posted by loiseau at 3:56 PM on June 15, 2008

He's better off doing an AOR or App-O-Rama. Read FatWallet for more information. You'll actually make money doing this.
posted by Brian Puccio at 5:04 PM on June 15, 2008

As others have said this will fail wonderfully eventually. Did he seriously think this would work? I mean, it's not that great an idea as to have never been thought of, and therefore tried, before.
posted by oxford blue at 7:15 PM on June 15, 2008

Has my friend found a way to make free money?

Regardless of clarifying details, this question has a universally applicable answer.

I think you already know what it is.
posted by flabdablet at 10:39 PM on June 15, 2008 [1 favorite]

I won't pile on with the what the others have said; I think you get the picture.

However, there is a legitimate way to make money in a similar way to what your friend suggests, if you use a card that offers free balance transfers and/or cash advances with 0 percent APR for the first 12 months.

Here's what you do:

Open account, and request a cash advance for the maximum allowed on the card. Deposit the balance in a high-interest money market account. At the end of your introductory 0 percent APR period (12 months), remove the money from the money-market account, repay the card, and pocket the interest. If you have really good credit and qualify for a decent maximum balance, you can actually make a good amount of money doing this, if you use multiple cards at the same time. I have a friend who made over $3,000 using this method, taking out $80,000 on three cards and investing in a savings account yielding 4.75 percent. Most people don't qualify for advances this high, though, and interest rates are lower now than they were a year or two ago. Plus, it takes an incredible amount of effort to stay on top of things and if you screw up, you'll owe a ton of interest and your credit rating will plummet. I wouldn't recommend anyone try it unless they really know what they are doing.
posted by btkuhn at 10:42 PM on June 15, 2008

Even assume the ideal situation of a set of 0%, no-fee interest cards that he can bounce between indefinitely. Assuming that he will, one day, keel over and die, there will still be an unpaid balance. The credit card companies will still pursue payment in the form of litigation against whatever living family members he has. I'm not sure what happens if one has no living connexions.

But hey, if he wants to sacrifice marriage and children for the sake of getting away with free money (even in a magical land of no fees and interest), that's his business.
posted by spamguy at 7:39 AM on June 16, 2008

Bill Veeck, the greatly missed American baseball entrepreneur, kept the Cleveland Indians afloat for an entire year doing essentially this. He used easy credit loan shops rather than credit cards, as credit cards had not actually been invented yet. This was in the 1950s, as I recall. The Indians won the World's Series in 1948, so he was able to pay everyone back. However, he later lost the team due to a divorce settlement with his second wife.

Some details are on Wikipedia, but the loan-kiting story is in his autobiography Veeck, As In Wreck, which is a great book.
posted by vilcxjo_BLANKA at 10:19 AM on June 16, 2008