Stoozing, and its Side Effects

We've all become accustomed to the fact that credit card companies charge us interest fees for the use of credit. That's just how it works. The average American consumer has anywhere from five to nine thousand dollars in credit card debt, depending on which source you get the number from.

If we're lucky enough to get an offer for a card with a 0% introductory APR, we often jump at the chance to transfer existing credit card balances to save some money on interest charges for six months to a year. Well, some financially savvy folks have taken this one step further. Instead of merely saving money through a credit card's introductory offer, they're making money.

They take advantage of a card that offers a 0% intro rate on cash advances, and stick all the money into a high-yield savings account during the introductory period. They continue the cycle by applying for a new card with a 0% intro rate to pay off the original card before the interest free period ends.

This method was popularized by a MotleyFool.com contributor in the UK, by the username of "stooz", and so the slang term for this technique is known as "stoozing".

Some have turned stoozing into a serious little side business. They've found the highest-yield savings accounts to put the credit card company's money into. Some have managed to open credit card after credit card to continue the earnings. The high-interest savings account is used for nothing other than to earn interest, and to make the required monthly minimum payments.

Just before the free ride with that particular card is over they will, hopefully, pay off the card with another ready-and-waiting zero interest balance transfer. If another credit card is not a possibility, they will take the money from the high-interest savings account to pay off the balance. The interest that's left behind after paying the credit card balance is their profit.

The success of stoozing is dependant on the safety and liquidity of the cash advance, that's why a bank savings account is recommended. It's extremely important that the stoozer not get greedy and put the cash advance into riskier investments in the hopes of higher returns.

If the stoozer were to invest in the stock market, and the market flops before the the card can be paid off, the stoozer could easily lose a lot more money than they would have ever profited from stoozing. The same thing applies to real estate; if a stoozer couldn't unload or refinance a property before the typical six to twelve month introductory period, they could end up owing more interest than they'll profit.

Stoozing requires great attention to detail, discipline, and good timing. Dramatic credit card APR increases are typical after a generous promotional period. If a stoozer misses paying off the balance, in full, before the end of the promotional period, they could be hit with interest charges on the remaining balance that are high enough to wipe out any interest earnings. They could even ending up spending more than they made in interest. Stoozers must also be very careful to not spend the principal while it's sitting, so temptingly, in the interest-earning savings account.

It's important to read all the fine print in a credit cards terms and conditions if you're considering stoozing. Some cards offer 0% only on new purchases, and not on balance transfers or cash advances. Some apply the 0% APR if you direct transfer to bank account; many don't. Some credit cards truly are zero interest on balance transfers; some charge a 3% transfer fee (possibly to avert stoozers). Make sure you know what you're getting into before you apply!

While there's enough evidence and testimony that this trick has worked for quite a few, it's not a realistic plan for many of us. First of all, for a person to benefit from this, they can't have any debt. The average "high-yield" savings account in the U.S. is earning about 2-3%, far below the average credit card debt costing anywhere from 9-18%.

Anyone who is paying credit card interest is smarter to take the savings by transferring their balances. While I'm aware that there are plenty of responsible Americans out there with no credit card debt, the fact is that more than many of us have a significant amount of credit card debt and would be better off using the 0% intro rate to reduce our interest costs rather than to increase our income.

The next issue is that a person must have very good credit to successfully stooze. Many 0% introductory offers are limited to people with credit scores in range of 700, and up. On top of that, stoozers typically max out their available credit, in order to earn interest on as much cash as possible. With their debt utilization ratio at 100%, credit scores will drop.

This will reduce the likeliness of getting another 0% credit card to pay off the first. If someone has borderline-good credit, one maxed out credit card may be enough to dry up the rest of the introductory offers. Someone who has excellent credit may be able to sustain stoozing for some time, but be aware that you never know when the game will end for good.

Credit card companies offer the 0% rate because they're planning on future profit; they're investing. They want to lure you in with these super low rates so that your balance grows until the promotional period ends. They're gambling that you'll fail to pay off the balance before the APR jumps. They're banking on the hope that you miss the deadline after all the balance transfers, over-shopping due to a low interest rate, and failed stoozing attempts.

While the 0% introductory offer is a common practice with many issuers for now, it could end at any time when they realize they aren't getting anything back. If you're in a position where stoozing is a sensible money-maker for you, good luck with it, just be aware that it could come to a halt when credit card issuers realize their investment isn't paying off.