The Walrus - Personal Finance Blog & Investment Resource

A Mountain of debt

January 20th, 2008 Posted in Debt management | No Comments »

I came across an article by Demos that talked about the increasing levels of debt incurred by Americans. It’s a sobering analysis of the trouble that many people face. Here are some of the findings:

Between 1989 and 2006, Americans’ overall credit card debt grew by 315 percent
from $211 billion to $876 billion (2006 dollars)
Nearly six out of 10 households with credit cards revolved their balances in
2004. The average amount of credit card debt among those households reached
an all-time high of $5,219, an increase of 89 percent from $2,768 in 1989.
From 2001 to 2006, homeowners cashed out $1.2 trillion in home equity, often
in an effort to cope with mounting credit card debt and to cover basic living
expenses.

What surprised me most about this article was the age group of people who are in debt. While 31-44 year olds carry the most amount of debt, the growth rates of credit card indebtedness increase with age. The common perception of those swimming in debt is the individuals who indulge in luxurious buying and exotic getaways. Times have changed. Rising health care costs have left an aging baby boomer population with no choice but to borrow money to meet needs. The problem gets worse when you consider that these same people took advantage of a real estate bubble to glean cash from equity in their home. The prices of homes are falling in many areas and credit card debt is consuming disposable income. This is a recipe for long-term stagnation or a short term and very damaging recession. Let’s hope we see neither.

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Stoozing

January 20th, 2008 Posted in Making money | 33 Comments »

I’ve read a lot about Stoozing (also called Credit Card Arbitrage) and I think it’s a legitimate way to make money. The only catch is: you need to be incredibly good with managing debt.

What is Stoozing?
Borrowing money from credit card companies at 0% and investing that cash into a high-yield savings account, before paying off the original loan and netting the difference.

How does it work?
Stoozing requires you to open up a credit card which offers 0% interest (typically for 12 months) on balance transfers and cash advances. The cash isn’t spent, but is invested in a high-yield savings account offering a guaranteed return. After the introductory period is over you can pay off the original loan or transfer the balance to a new credit card which again offers “0% on cash transfers”.

Benefits of Stoozing

Using other people’s money (OPM) to invest.
Typically no upfront costs
Can supplement your current income
Has long-term potential of building/boosting your credit rating
Plenty of offers out there for 0% on balance transfers

Risks of Stoozing

If not managed properly, you could incur very heavy penalties on late payments.
Spending the money and not having enough to pay it back at the end of the loan could leave you depleting your savings or owing a lot of money
Opening up new credit cards will temporarily lower your credit rating
The risk of mismanagement and neglect to repay the loan can negatively affect your credit card rating, leaving it hard to borrow in the future (i.e. mortgage).

How much can I make?
I found this Stoozing calculator online and you can enter in a number of variables to determine how much you could make.

My thoughts
This is a very clever way of making money. You’re essentially taking advantage of credit card offers to help you make cash on the side. I’ve often been asked: “Is this legal? It sounds like it’s against my morals”. First, it is obviously legal to open a credit card and request cash advances. People do it everyday. As far as the moral argument goes, forget about it. Credit card companies are purposely targeting you to open up cards with the hope that you will fail to pay and constantly run balances. That’s how they make money.Why not beat them at their own game while supplementing your income?

I plan on trying this out and I’ll discuss how it works out for me. My main problem so far is finding a credit card that allows me to take out a cash advance with 0% down instead of just a balance transfer. I run no balances on my credit cards so I need a card that will let me take out $10,000, for example, with no questions asked. This is called a Super Balance Transfer (SBT). You need only one card that allows a SBT transfer and these are a little harder to find. They seem to be more plentiful in England, where Stoozing originated.

Resources
http://en.wikipedia.org/wiki/Stoozing - Wikipedia article
http://www.stoozing.com/ - A stoozing guide and forum

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