AskDong

This topic has been well covered by other personal finance blogs. This post is less about how to perform a credit card arbitrage, but more about evaluating such an arbitrage.

Let me first come clean, I don’t do any credit card arbitrage anymore for a couple reasons.

1. Too much hassle for what I deemed it worth
2. Trying to improve my credit ahead of potentially as I prepare for a home purchase

Those two things aside, I did use a few different balance transfer offers during a 3 year period as way a paying down some of my Home Equity Line (HELOC). People tend to use balance transfer offers as way of paying down higher interest debt as I did or as way of investing the funds from the balance transfer into high interest savings account like HSBC. In either case you earn a spread between the borrowed amount and either the interest avoided or the interest gained.

Let’s take a look at my past situation, the HELOC given that it’s more complicated calculation given both the tax issues, different amortization periods of the HELOC and the credit card balance transfer. I think as always it’s also important to consider after tax rates. Tax effects only come into play when comparing different tax advantaged or disadvantaged accounts as the case may be. In this case HELOC interest is tax deductible while the payments made to credit card are not (of course with a 0% card that’s a moot point).

* Numbers In Table Above Represent Rough Calculation, actual numbers will differ depending on compounding period, and payment schedules. 

Credit Card Balances
The required minimum payment went up in 2005. Credit cards used to commonly charge 2% of balance or some nominal dollar amount. Now minimum payments must cover interest, late fess, and at least 1% of the outstanding balance. From personal experience that minimum payment seems higher than that. For instance on my Universal card had amortization schedule of 4 years but that was a balance transfer at 1.9% for the life of the balance instead of temporary 0% offer.  The minimum payments are important to keep in mind because even though you might be making money, the minimum payments in comparison the minimum payment for the HELOC might be too large from a cash flow perspective.   If you’re just putting the money into savings account this is not an issue as you can just withdraw money from the savings account to meet the credit card payments.

As I said, I don’t play the balance transfer game anymore. I was never one to actively play it, but another reason is just because good offers don’t come my way anymore. I believe credit card companies are reluctant to offer 0% with the higher prevailing interest rates.  In addition the offers that have been delivered to me have all come with strings attached. The most prevalent is a balance transfer fee of 3% which is a drag on earnings.  The Discover offers (and I’m sure others) have come with a stipulation that a purchase must be made on the card every month to keep the 0% teaser rate in place.  Of course the teaser rate doesn’t apply to purchases.  While it’s possible to just buy a pack a gum a month to guarantee that rate, it seems like too much planning and too much work.  I’m at heart kind of lazy and ultimately balance transfers are too much work for me to keep up with.   While I’ve never triggered the higher rates via a late payment or anything like that, I’m not willing at this point to take on that operational risk to make 3.5% (though you could argue it’s a infinitely leveraged and therefore like a infinite return).

If you don’t want to learn more about balance transfers, I refer you to some articles from members of my blogroll.

• 2millionblog
• Blueprint For Financial Prosperity

I’m sure Mr.Credit Card has a thing or two to say about the actual cards as well.

Next up is Real Estate Investing.   This potential topic can be a doozy,  so I might split it up into a couple posts.  Given that I have neither written it nor am a real estate shark, I’m not sure.  I have one rental - my old condo which I moved out of last year.