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.


Alex said...

I too am considering the 0% interest credit card game (just as it is dying). Some questions I have as a newbie:

is the fact that you are maxing your credit card limits out going to cause any kind of universal default type negative repercussions or just hurt your credit score?

How long does your credit score stay hurt, i.e. how long after you pay off the balance will it take for your credit score to normalize?

The Invisible Spinster said...

I take 0% offers and invest the cash at 5%. The account pays the transfer fee and minimum monthly payments. Depending on how many offers I have in the pot, I get between $300-500 a month for my trouble.

One thing to be VERY CAREFUL about: many banks no longer have an upper limit to the balance transfer fee that they charge. It won't completely negate your return, but it's a serious dent. Always read the fine print!

Depending on how fast you max out your cards and/or open accounts, you may upset some of your other creditors enough that they close accounts on you.

Tanking your credit score is a serious risk you take playing this game.

Angie Hartford said...

I hope this works for you; keep us posted, please. Remember: if you use the cards for any other purchases, those purchases garner full interest rates the entire time you're paying off the balance of the 0% portion. Ouch!

KMull said...

Oof! Just not worth it to me... good luck!

Moneymonk said...

You must be very careful with this. One wrong move or one day late can cost you. I rather not deal with the arbitrage game.

It's just not worth a couple of hundred dollars

Julia said...

I too just reshuffled my LOC debt to two credit cards that were offering low interest rates for a period of time. Here in Canada it's rare to find a 0% credit card offer, but as long as the offer I get is in the single digits, I'm happy. It's a little frustrating to have to do the "shuffle" every 6 or 7 months, but if it saves me some cash in the long run, I'm happy with it.

I haven't yet tried the "take the cash advance & put it in a savings account" trick yet, but that's just cuz I'm not comfortable doing it just yet. Maybe by the end of the year when I've paid off more of my debt.

Tim said...

i was getting nervous about arbitrage, but ended up doing more. unfortunately, we're at a point where we maxed out what we can get and any new cards. we'll have to wait out a year before we can do anything else again.

it can be daunting to have that much credit debt out there. and it is important to read all the terms and conditions carefully. if you aren't comfortable doing this, or have the tendency to blow cash if it is laying around, this is definitely something you should NOT do.

good luck on this one.

Anonymous said...

My Hubby is looking to buy on credit a newer truck and I just went for a 0% credit card to help get his big screen tv paid off...do you think this will affect our credit rating?

Anonymous said...

If the answer to the above question is no...do you think it would be wise to transfer another balance to another 0% credit card to get it paid off faster and save money on interest charges? I am the same person that asked the truck and tv question.

My Trader's Journal said...

I think this can be a good move and you've thought of a lot of the downside risks and seem to have a solution for them.
I haven't played this route before, but have moved money around for free stuff like an iPod shuffle a few years ago and 10,000 Sky Miles before that (twice). Getting free stuff is fun, where it's goodies or interest. It still all comes down to clicking for 15 minutes on your keyboard to have more "stuff".

Reggie, the black kid with good credit said...

arbitrage scares me - $45K in credit debt? That's really scary for less than $200 a month in 'return' - like Money Monk says - one wrong move will cost you.

If I had say $100K in cash stashed away and wanted to put 10K on credit card for an arbitrage - that MIGHT be ok. seeing as my finances are nowhere near that good right now I'll stay away.

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PiggyBankBlues said...

good luck, man. in these times to play the credit card game is like hanging with a rabid lion. i'm sure you are very careful, i just can't stomach the risk for a few hundred dollars.

Millionster said...

ha good luck with that.. =) !

investmentor said...

It is a way to leverage your investment. Safe investments (5% range) will produce $1,800 at a "net" 4% on $45,000 in a year's time. As long as the market doesn't turn against you, maybe even larger returns with the extra risk.

1) Fees: (Spinster's warning) -- watch those fees (particularly the max amount) in the fine print.

2) Other charges: (Angie's warning) -- Don't purchase ANYTHING else on these cards, and make sure that you have a zero balance on the most previous statement before you write the check.

3) HELOC limit: make sure you have a good cushion on your line to "buy back" that credit card debt if necessary. Make sure that line is "locked", and bank can't decrease line arbitrarily. (Any provisions for periodic reviews or reappraisals or "universal" default in the HELOC fine print?)

4) Payment "games": I took out such a low-interest advance with Providian. Couple of months later, they "lost" my payment -- charged me a delinquent fee, and bumped my rate up to the maximum default level. I now pay pay electronically, at the credit vendor's website, and get a confirmation number that I print out. I have since read several articles about customer complaints on Providian "losing" payments -- including testimony by a former employee about payment letters being trashed. Could happen with other cards -- or even a Post Office snafu.

5) Credit Rating: If you utilize over 30% of your "available" credit lines, the credit scoring systems will ding you -- and ding you hard if you are maximizing your lines. Lower score will also affect your insurance rates for car, home, and other casualty coverage in most states. Lower score might make it harder to get additional low rate offers next year when you need to "roll over" the debt.

kitty said...

", I did not have to do a balance transfer, i.e., I did not have to already have credit card debt."
From what I read, you don't have to have a balance to transfer it. Transferring from a card with 0 balance to another credit card, gives you a negative balance (credit) on the first card. Once you have it, you can call the first card and tell them to send you the check for the money they owe you.

To avoid "payment games" mentioned in the post above, you could set up automatic payment for the minimum. This way you'll never be late and you'll have the option to send additional money if you feel like it.

I haven't played this game myself, but I've read posts of people who did.

Kevin said...

This statement you made is misleading, "First off, I did not have to do a balance transfer, i.e., I did not have to already have credit card debt."

You don't have to have credit card debt to do a balance transfer all you need is a credit card, which you have. You could have gotten an Amex card and transfered the balance to your BoA card. It would just show an amount owed to you on you BoA, which you would get in the mail by asking for a refund check.

Citibank cards are the easiest to do a balance transfer. When you ask for the balance transfer you can have them mail you a check.

I've been doing this for the last 5 months and find it very easy. I pay minimum amount +$10 each month on the day my new statement is issued and count the interest I make each month. The lowering of the saving account interest rates sucks though, but that just means it is possible to borrow more money.

Anonymous said...

...not smart at all. I invested in a ROTH IRA and with the current market situation, mortgages, etc. you are in a world of hurt. With my Roth alone I have lost 1/3 of what I invested 2 years ago. The best thing to do right now is keep your money liquid (cash) or invest in fine minerals such as silver or gold. Even on a poor market, bonds aren't going to do anything at this time if a recession happens. Bonds will fall too.

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