Tuesday, July 3, 2007

Confession – I am dipping my toe in the 0% balance transfer game

Well, I’ve done it. Something I said I would never do. Something I said was a complete waste of time. I’ve argued that it wrecks your credit score, and diverts your precious attention from investing, all for a few measly thousand bucks a year.

I’ve borrowed $22,000 on a credit card. And it wasn’t even a 0% card! And I plan on borrowing more!

The situation is as such: A little over a year ago, my wife and I assessed our lives and what was happening within our marriage. I was working 60-70 hours a week, often not even seeing my young daughter at all during the day – I’d leave early in the morning, and arrive home with her already asleep. My wife was working a job that was stressing her out too. She once quipped to me that she felt “like a single mom.” That was a real eye-opener – sort of a mix between a slap across the face, and a reality check.

We made changes. I accepted a job for less money that’s one mile from our house, and my wife went part time, which eliminated the most stressful duties of her job. We took a big financial hit, but it has actually increased our quality of life.

It has not increased the quantity of our portfolio, though. My investing goals have not changed (20% rise in net worth every year for the next 15 years), but it did slow us down a bit.

Then, my wife was pregnant with our second child, and it was time to ditch my old car. Time for a minivan. Back in February 2007, we purchased a used 2006 Honda Odyssey. I used our Home Equity Line of Credit to make the purchase. After trade in, it cost us $16,000. After borrowing on the HELOC, the balance was back up to $45,000. This balance consisted of the minivan purchase, a few home repairs we had made, and the down payment on our lakehouse (I still plan on posting about our October 2005 lakehouse purchase, and where it fits into our retirement plans).

The HELOC’s interest rate is Prime minus .01, or 8.24% at this time. As I am able to deduct this interest on our taxes, the after tax interest rate is 5.93%. That means right now, I’m coughing up over $300 a month in interest.

Not that this matters to the discussion, but I am completely comfortable with the portion of the HELOC debt related to the lakehouse. Trust me, this was a good investment, and is a blast to boot. I am less comfortable with the minivan purchase, even though the van rocks and really is a great way to get the family around.

Couple all of this with my desire to continue investing (it’s been going so well this year, why stop now?), and the fact that we’re not going applying for any large loans any time soon (no more apartment building purchases, one is enough – therefore, less of a need for a top-notch credit score), and it was clear to me – I have to get this debt shielded from interest.

Bingo – throw it on a bunch of 0% credit cards. The typical credit card arbitrager (is that a word?) is taking the cash pulled from their credit cards and investing it in a high-yield savings account. The highest online rate I’ve seen is 6%. By eliminating this monthly interest charge, I am in effect earning about 6%. Better yet, I can use that savings to pay down on the principal.

To fully shield us from interest, I need to get the full $45,000 onto credit cards. My first transaction involved a card we already held – a Bank of America Visa card. It’s one my wife held but never used. They sent us a letter stating that the credit limit had been raised to $18,000, and that a balance transfer or a cash advance could be done at 0.99% APR until November 2007. This included a max fee of $90.

I called and tried to get them to waive the $90 fee. They could not do that for me, but they did extend the offer until March of 2008, while raising the interest rate one one-hundredth of a point to 1.00% APR. They also raised the credit limit to $22,000. It had just been raised to $18,000 – why not raise it to $22,000?!?!?!?

So this was not the perfect deal, but there were some things to like about it. First off, I did not have to do a balance transfer, i.e., I did not have to already have credit card debt. Since I bank at Bank of America, they were able to wire the money right into my checking account. Second, the 1% interest rate is going to cost me about $18/month in interest – it’s not zero, but it’s not too shabby. Third, the $90 fee was more than I wanted to pay, but I calculated that by shielding this $22,000 from the high interest rate I was paying, I will have saved approximately $1,000 by the time March rolls around.

And besides that, I don’t plan on stopping. I am going to apply for a Citi card next, as I believe they will also send me a check (or wire me). Hopefully I can get the remaining $23,000 onto 0% cards, and then just keep hacking away at the principal, while also investing in our Roth IRAs.

And if it ever does come time to pay the piper, I have my HELOC checkbook. I write a check to the credit card companies, and we’re out of credit card debt.

Even my wife, who is a cautious cat, eagerly endorsed the idea. The HELOC debt bothers her. It bothers me, but to a much lesser extent. I have our net worth steadily on the increase, and this debt is manageable, so I’m not freaking out about it. But she wants to increase the pace with which we get it paid off, while I want to continue to invest while still paying the debt down. Not an argument, per se. She trusts me, and we’re doing well. But it surprised me how quickly she saw the wisdom in this credit card arbitrage plan of mine.

I’ll keep everyone posted as to how it goes, but I’m excited to get out from under this debt, and this plan should accelerate that. I welcome any comments or advice you might have.