“I found your junk mail story [about the Discover Card checks] amusing, but for a different reason. For the last eight months or so I have been getting an interest-free loan from my credit card companies due to these convenience checks. As it happens, two companies (Chase and First USA) sent me these junk-mail convenience checks, but WITHOUT a transaction fee and with the usual grace period. I had to read the small print multiple times, but there was no catch! Well, I had about six of these checks from each credit card company, so I’ve actually been paying one credit card with another using these checks, and accumulating the money in a Money Market account. A few months ago, I even made some short-term equity investments with this money, and I still can’t figure out how these banks are making any money.” — Daniel Roitman
They’re not — with smart cookies like you.
Does everyone see the opportunity here? If a credit card company sends you some checks it encourages you to use “just like real ones,” there are usually two catches. The first, as with the Discover offer I wrote about, is that it costs something to use them — so the banks make money if you do. In the case of the Discover offer, there was a 2.5% fee even if you paid your balance in full on time. Not so, apparently, with the checks Daniel was sent.
What Chase and First USA (and all the other credit card companies) hope is that you won’t pay your credit card balance within the grace period. In which case, everything starts accruing interest — the money you wrote those checks for, plus all your other charges, even if you normally pay those on time. So that’s the second catch.
But in Daniel’s case, let’s say he has a high credit line and wrote one of these Chase Manhattan Visa credit card checks to his own money market account, for $5,000. He deposits this $5,000 in the money market and it begins earning 5%, or whatever. Then, when he gets his credit card bill, with this $5,000 charge reflected on it, he uses one of the checks from his First USA credit card to pay off his bill in full within the grace period. So that $5,000 is still sitting in the money market account earning interest. Now, a couple of weeks later his First USA credit card bill arrives, reflecting the $5,000 he used to pay off Chase. He uses a second Chase check to pay off First USA.
Eventually, when the checks run out, he withdraws the $5,000 — which may now be $5,150 with interest — and pays off his credit card.
This is quite different from kiting checks, which is illegal. A check kiter is someone who writes a check with insufficient funds — but keeps it from bouncing by depositing a check from another account with insufficient funds — and keeps moving them around hoping that, because of the delay in clearing, none of them will bounce.
Here, Chase and First USA were apparently enticing cardholders to borrow more by running an interest-free “sale.” They are gambling that most people won’t pay their balances in full within the grace period (even if you’re just $5 shy, interest accrues on everything, plus everything new that you charge).
I’m not suggesting you risk getting all tangled up with this just to beat the card companies out of a few dollars in interest. But when the checks they send are truly free of transaction fees and interest if paid off within the grace period — and if you’re sure you will pay off the balance on time — then congratulations: you’ve been offered a short-term, interest-free loan.
(One friend of mine has been doing something similar with the Visa card America Online offers. He has a $17,000 credit line and got some of these checks. After checking to be sure there was truly no fee or interest, he wrote himself a $17,000 check which he put to work earning interest in his money market account and pocketed $170 worth of free time on AOL, taking care to pay off the $17,000 credit card balance within the grace period. So in his case, it was an interest-free loan and almost six months’ free time on AOL.)
Be certain to haul out your magnifying glass and read every iota of fine print in these offers before attempting something like this. You don’t want to start borrowing at 18% accidentally, and you don’t want to get into a billing dispute even if you would eventually win — it’s not worth the hassle.