Chase's Revival of Free Balance Transfer Card Is Questionable

NEW YORK ( TheStreet) -- What on earth is Chase up to?

It's a fair question to ask in reaction to the decision by the nation's largest bank to offer products with questionable profitability. You see, JPMorgan Chase ( JPM) is at the forefront of the resuscitation of free balance transfer credit cards, which offer introductory 0% balance transfer APRs and do not charge balance transfer fees. Issuers once made money off these cards by instituting default rates at the drop of the hat, but since the CARD Act prohibited such tactics, free balance transfer offers were believed to be collateral damage of this pro-consumer reform law and in fact disappeared for a couple of years.

Until recently, that is. Chase and Discover ( DFS) reintroduced this genre to the credit card market a few months ago. Discover's quick discontinuance of their online offer for the No Balance Transfer Fee More Card only served to support the theory that these cards are unsustainable and fuel curiosity about Chase's motives in offering a No Balance Transfer Fee Slate Card with 0% interest on transferred debt for 15 months.

There are really only two possible explanations when you get down to it: 1) Chase believes that free balance transfer cards can be gateways to significant profits or 2) They want to give investors the perception of credit card growth.

Free balance transfer credit cards: profitable bait?
Starting with the first possible explanation, it's at least conceivable that free balance transfer credit cards could attract a sizeable number of new customers for Chase, which can then cross sell them other, more profitable products and actually make money when all is said and done. While these cards themselves generally won't bring forth any revenue for at least 15 months, they are extremely attractive to the nearly 40% of consumers who have revolving debt, according to the National Foundation for Credit Counseling's 2012 Consumer Financial Literacy Survey.

With a foot in the door thanks to the obvious appeal of a free balance transfer, Chase gains a captive audience for its bank accounts, car loans, mortgages, etc. And since only around 7-10% of consumers switch banks each year, Chase, it seems, is banking on these new customers sticking around for a while.

Trying to recoup losses incurred during the Slate Card's 15-month intro period in this manner is a very risky bet for Chase to make, though, and it most likely won't pan out.

Chase: giving the false impression of growth?
Some of the most common metrics tracked by investors researching major banks are the outstanding balances and default rates of their credit card operations. Together, they can provide a snapshot of how much business a bank does, given that credit cards are some of the most popular products offered by banks, and how efficiently it does this business, as default rates are directly correlated to underwriting sophistication.

But what happens when a bank adds a bunch of new accounts that have revolving debt but won't make it any money? Well, outstanding balances go up and default rates go down, but the bank is not operating its business any more effectively and is not turning a greater profit. If anything, it's losing money in the process. Investors won't know that for some time, though, and could be misled into putting more money into the company, thereby driving up stock prices and making executives richer.

Conclusion: Questionable for Chase, Good for Consumer
Only time will tell exactly what Chase is doing, whether or not it's successful, and whether other major issuers like Bank of America ( BAC) and Citibank ( C) will follow suit.

In the meantime, indebted consumers have a very lucrative opportunity before them. By transferring a $5,000 balance from a card with a 15% APR to the Slate Card, for example, and paying it down within the 15-month 0% introductory period, one would save well over $500 in interest. And in a time of high gas prices and rising debt levels, we could all make do with an extra $500 in the bank.

--By Odysseas Papadimitriou, CEO of Card Hub, a website that helps people find the best credit cards for their needs.

For more on free balance transfer credit cards, visit Cardhub.com.

More from Personal Finance

Summer Travel: The Best Places to Visit in the U.S.

Summer Travel: The Best Places to Visit in the U.S.

9 Best Investment Books for Beginners

9 Best Investment Books for Beginners

How to Calculate Your Net Worth and Pin Down Your Financial Health

How to Calculate Your Net Worth and Pin Down Your Financial Health

The Best States for Millennials' Money and Health

The Best States for Millennials' Money and Health

U.S. Banks Urged to Make Small Loans In Competition With Payday Lenders

U.S. Banks Urged to Make Small Loans In Competition With Payday Lenders