Credit Siphoning for Mr Average

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The world is full of offers from Credit Card Companies trying to persuade us to move our credit cards from our current credit providers to them. During the ‘good times’, before the Credit Crunch, there were many offers of zero percent interest for a fixed period of time, usually varying between three months and a year. Whilst zero percent offers have now almost entirely disappeared, there are still a variety of very attractively low percentage rates available.

In order to take up their offer to move the amount of money you owe on your current credit card onto a new one, most Credit Card Companies demand that your pay a Transfer Fee. This is typically around 3%. This means that if you owe $10,000 dollars on your current credit card, it would cost you $300 to move it to a new card.

In effect, by requiring a Transfer Fee, the Credit Card Companies are guaranteeing themselves a bonus on the transaction, so that they can cover their initial administration costs up front.

If you were to move your Credit Card between Credit Providers on a regular basis, several times a year, you would wipe out whatever benefit you gained from the low introductory interest rate. This means that we can only make a saving out of changing Credit Providers if we remain with the new Credit Card Company for a reasonable length of time.

The struggle to take advantage of low introductory interest rates can involve a lot of calculations if we are to make best use of them. If we have to pay a minimum of 3% of our outstanding balance on a credit card each month, then moving to a new card with a Transfer Fee of 3% means that we have avoided paying a month’s repayment but we have spend that sum of money on a fee. Moving on this basis would give us no saving at all.

This is where the technique of ‘Credit Siphoning’ comes in…….

Credit Siphoning is a method by which large international corporations move money they have borrowed between one international financial centre and another, to take advantage of better rates of interest, but without paying Facility Commission (the equivalent of a Transfer Fee). The method used is to take on a new loan agreement and then to use that loan facility to fund spending that would never normally involve credit (like paying salaries, for instance) and then to pay exactly the same volume of money off old borrowing.

Let’s look at Corporate Credit Siphoning in action:

1. The Universal Wibble Company  has borrowed $52 million from First Credit Bank.
2. The Univesal Wibble Company signs a new borrowing agreement for $52 million with New Credit Bank.
3. The Universal Wibble Company calculates its weekly wages bill for staff as $1 million.
4. The Universal Wibble Company borrows $1 million dollars from New Credit Bank on a new agreement.
5. The Universal Wibble Company then pays out New Credit bank’s $1 million in the form of wages.
6. The Universal Wibble Company now pays $1 million off its debt to First Credit Bank.
7. The Universal Wibble Company now owes $1 million less to First Credit Bank and $1 million more to New Credit Bank.
8. The Universal Wibble Company repeats these steps 52 times.
9. At the end of a year, The Universal Wibble Company now owes nothing to First Credit Bank and $52 million to New Credit Bank without having paid any Facility Fees in the process.

How can a private individual mimic the actions of International Corporations in order to get the maximum benefit from moving between Credit Card Companies?

1. Mr Average has borrowed $5,000 from The First Credit Card Company.
2. Mr Average signs up for a new credit card with a $5,000 limit with The New Credit Card Company.
3. Mr Average makes payments of $250 a week from his bank account for various regular purchases and services (fuel, food, rent etc.).
4. Mr Average pays all his regular $250 weekly spending on his new credit card from The New Credit Card Company.
5. Mr Average pays off $250 dollars from his old credit card with The First Credit Card Company.
6. Mr Average repeats these steps for 20 weeks.
7. Mr Average now owes nothing to The First Credit Card Company and owes $5,000 to The New Credit Card Company. The sum owed has now been ‘siphoned’ from the old credit card to the new one.
8. The amount of interest paid has declined from being wholly the old higher rate to now being wholly the new lower introductory rate over the 20 weeks.

The higher the volume of weekly or monthly payments made from a normal bank account that is funded from earnings, the quicker the debt can be siphoned between credit cards and the more efficiently an individual can benefit from a reduced rate without paying a Transfer Fee.