Balance Transfer Arbitrage

This offer is no longer available (WaMu was acquired) but here is a list of the best CD rates.

Tired of 3.5% APY yields? Washington Mutual has upped the ante by offering a 12-month certificate of deposit with a 5.00% APY interest rate with a $1000 minimum deposit. The offer is limited time only so act quickly.

Some other details of the offer:

• $1000 minimum
• You can open it online, so open a WaMu checking/savings account combo and fund it through that. Afterwards, you can shift your funds back to your WaMu accounts and get 3.75% APY.
• Early withdrawal penalty of 3 months

You can get your credit history for free every single year from each of the credit bureaus (annualcreditreport.com), but there’s no way for you to get your credit score for free.

Why would you want to know your credit score all the time? It’s the very same reason why people jump on a scale to check their weight, while your credit score doesn’t define you, it’s an important metric you should always have a good picture about. Knowing your credit score gives you an advantage over lenders because you know how credit worthy you are. The price of this knowledge is small, the value is limitless.

Why Tracking It Matters

It’s been shown that people who get biofeedback, that is knowledge about their biological statistics like pulse/heart rate, blood pressure, etc; are more able to control their statistics. With feedback, we know whether the unconscious decisions we make can affect our own bodies. Want to slow your pulse? Take your pulse and “try to slow it down.” You’ll notice your pulse count will go down, though all you’re doing is “trying,” not doing anything specific.

Tracking your credit score is similar, except the actions you take will be a little more explicit. Open a credit card and see how your score is affected. Wait a month with no activity, see how your score is affected. By tracking your credit “pulse” as you go about your life, you’ll have a more accurate picture of how your score is being affected by the things you do. No more guessing based on experts giving general advice or thoughts, you have hard facts.

You Have A History

When you have a history of your score, you have more information on that score is affected by your decisions. When you bought a car, did your score go up or down? When you took out a balance transfer, did it go down a lot? When you paid off the transfer, did it go back up? Did it go back up past where it was before the transfer? By having this history you know for certain.

I haven’t seen a no fee 0% balance transfer offer in a long time.

However, 0% balance transfers are still widely available, they’ve just instituted the standard 3% balance transfer fee. While this takes them out of contention for balance transfer arbitragers, they’re still a good option for people with credit card debt and would like a 12 month window to catch up as much as they can.

One positive about this whole situation is that some card issues have a 3% balance transfer fee with a maximum fee. This means that if you get a large enough balance, your effective percentage fee will be much lower than 3%. Let us take Discover Cards for example. In general, and you’ll have to check the card’s specifics to be 100% sure, the fee is 3% with a $75 maximum balance transfer fee. If you transfer $2,500, the 3% fee is $75. If you transfer $5,000, the fee stays at the maximum of $75 and the effective percentage is only 1.5%. If you get a limit of $10,000, your rate falls even further.

Here’s a roundup of the fee percentage amount maximum cap rules for each issuer in general (check the specific card you’re interested in to confirm):

• Discover: 3% with $75 limit
• Advanta: 3% with $90 limit
• Chase: 3% with $99 limit
• Citi: 3% with no limit
• Bank of America: 3% with no limit
• Capital One: No known 0% offers
• American Express: No known 0% offers

Are you thinking about doing some balance transfer arbitrage? If so, you will need a credit score of at least 650 points and a helpful list of 0% balance transfer offers. We have your back on the list, but you’re on your own in getting a strong enough credit score to be eligible for the offers out there on the table.

Do you know what your credit score is? If not, the best place to go is MyFICO, a service run by Fair Isaac and the originator of the FICO credit score. If the credit score you’re getting isn’t a FICO score from Experian, TransUnion, or Equifax, then the credit score you just paid for is worthless. That’s right, if it’s not FICO, no one cares. It’s a sad monopoly but if you want to play the game, those are the rules.

What’s MyFICO? It’s really just a service that gives you your credit score from one or all of the credit unions. Fair Isaac pulls your reports from the three bureaus, calculates your score, and then spits it back out to you. You can either go to MyFICO and get the score for each bureau or you can go to each bureau individually and get the scores that way. Either way you’ll have to pay for it.

For a limited time, you can get 20% off the regular price for requesting your score.

What about the government program that gives you one free report from each bureau for free? You can get your credit report via Annualcreditreport.com but it won’t give you your score. You can use it to check for inaccuracies and errors but that’s about it. It’s still very useful to check once a year, you just won’t get your score out of it.

With the recent Federal Reserve rate cuts, many online banks are sporting annual interest yields of 3.0% APY and below. With the rates as low as they are, are balance transfer arbitrage plays even worth it anymore?

The answer is yes, but with some caveats.

Scratch the Transfer Fees
When the rates were in the 5% range, a 3% transfer fee with a $50 or $75 cap was somewhat acceptable. If you could get a credit line of $5,000 then a max fee of $50 meant you were paying 1%. If you could earn 5%, that’s still $400 you were putting into your pocket (of which $100 would go to taxes later) for a little added effort. That same $5,000 with a $50 fee earning only 3% means that you only put $100 in your pocket of which $25 would go to taxes. $75 a year to make 12 bill payments a year? It’s not worth it to me and probably not worth it to you.

No Fee Transfers Okay
If you’re able to get a no fee balance transfer, a few still exist like the one from Citi Professional, then it’s still borderline. Is it worth it to carry $5,000 in credit card debt, make 12 bill payments, just to earn ~$112.50 after taxes? If you have zero chance of going after a loan in the next year and have plenty of time on your hands, it might be something you want to pursue. If you are, I suggest getting more than $5,000 because $112.50 is not a lot for your time and effort.

My Recommendation
The credit market is tightening, interest rates are falling, if you’re doing balance transfers to reduce the rates you’re paying for debt - get a 0% balance transfer. If you’re doing balance transfers for the added cash, hold off until rates get better (unless you can do better than a guaranteed 3%, say with a CD). Whatever you do, do not get a balance transfer and put it into something risky.

There are three solid reasons why you should never cancel your card:

1. You could be offered another promotional balance transfer. If you keep the card open, the card issuer has the opportunity to try to get more business from you by offering you yet another balance transfer. I’ve had issuers offer me another no fee 0% balance transfer after I finished off the last 0% balance transfer.
2. Closing cards will lower you score. It doesn’t really hurt if you keep a card open so you might as well save yourself some time by not closing it in the first place. Closing out a line of credit hurts because it lowers your total credit line and increases you utilization unless…
3. Roll it over into another card from the same issuer. Rather than cut off the credit, just roll it into another card. This way you keep the same limit and the same utilization but reduce the number of cards. Companies love this because it’s less paperwork and you have access to the same level of credit.

Unless you have a compelling reason to close out a credit card, there’s really no good reason to do so.

That’s right, 5% cashback on everything you buy with this new card from Citi - the Citi CashReturns card. This post is a bit of a departure from the regular 0% balance transfer arbitrage stuff only because the potential of this card to save you significant sums of money is absolutely amazing. If you are planning on making any large purchases in the next three months (say, a wedding? a big blowout vacation? big anniversary?), you absolutely have to get this card because you can save 5% on top of whatever wheeling and dealing you’re able to secure otherwise.

This card also offers a 0% APY balance transfer but it comes with a 3% fee that has no cap, thus making it a very weak candidate for balance transfer arbitrage. It does however make it a great candidate for high spenders (at least for three months!).

There are a few other nice perks like how checks are sent automatically after a $50+ rebate is accrued, none of that junk involving check requests.

Once of the nice things about balance transfer arbitraging is that the minimum payment for a particular card, after a transfer, will be the highest with the first payment. Each subsequent payment will be equal to that first payment or less, since your balance is going down and your minimum payment will generally be a strict percentage of that total value. So, knowing that, and seeking to simplify the process (and reduce errors), it makes perfect sense to auto pay your bill each month if you can. Just take your first minimum payment value and set that as the minimum payment each and every month. While this will result in a loss of some interest (very very small, we’re talking 5% of the extra you’re paying, this can guarantee you won’t forget a payment!

There are a few warnings I must impart on you:

• Don’t forget when the 0% balance transfer terms are up! It’s easy to forget that your transfer offer ends if you don’t have to remember to pay the bill each month, so set some sort of alert to warn you when the period expires.
• Don’t forget to review the bills each month because you never know what sort of shenanigans may be at work. If someone commits fraud and you don’t catch it until a year later, you’re going to be out of luck when it comes to the fraud department.
• Double check that your bills are monthly because sometimes cards bill you every 20 days, thus screwing up the math on the auto-pay. Confirm that you are billed monthly, on the same day, before trying this tactic.

A cash advance is not the same thing as a balance transfer! In fact, they are worlds apart. A cash advance is used generally by folks in a bind or those who accidentally cash one of those “convenience” checks that the cards send out. A cash advance typically has high fees and a high interest rate, the two biggest killers of a balance transfer arbitrage deal. A balance transfer, if you pick the right card, generally will have no fee and 0% APY interest - which make it at all a consideration for an arbitrage play.

When you make your request, be explicit in explaining that you want a “balance transfer” and not a “cash advance.” Credit card companies rarely make this mistake, giving you one when you expected the other, but people make mistakes and you don’t want to be the one paying if a CSR keys in a request incorrectly.

I bet that you have never read your credit card’s terms & conditions very closely, well neither have I. However, it’s not uncommon for the T&C’s to say “We reserve the right to change the terms (including the APRs) at any time for any reason, including no reason.” That’s right, the terms & conditions will say that they have the right to change the interest rates of your credit card debt for absolutely no reason whatsoever!

Unfortunately, this means that if you get a 12 month 0% balance transfer from a credit card company, they can change the interest rate on you whenever they want to. The only stipulation is that they notify you in writing thirty days beforehand, which doesn’t give you much time to react, does it?

Fortunately, they usually won’t do this for no reason because that would be some terrible PR. However, if you miss a payment, have a change in your FICO score, or have any adverse change to your credit; they will often use that as leverage to increase your interest rate.

So, when you get a 0% balance transfer, keep this one bit of information in mind. In fact, if you have those T&C’s around, scan them to see what they say.