Balance Transfer Arbitrage

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.

For balance transfer purposes, the Citi Professional Card has some great features that simply can’t be beat when it comes to the balance transfer arbitrage play.

• No balance transfer fee: Citi offers a lot of 0% balance transfers but some of them have balance transfer fees of 3% with a maximum of $75, but that fee has been waived on this card with this offer.
• 0% on balance transfers AND purchases: The 0% APR on balance transfers is a pre-requisite for a balance transfer arbitrage play but it’s nice that you get 0% APR on purchases as well. This means that you can make purchases and transfer a balance without worrying that a high rate purchase will get blocked by a big balance transfer.
• It’s a “Business card”: The card is designed for business expenses, hence the Professional moniker, which means that they’ll generally give you a higher balance than a regular consumer card.
• It’s a Citi card: Why is this good? Well they have a ridiculously easy balance transfer request process, you can request it online and have it sent to you as a check.

If I was picking my first card for a balance transfer, this card would be it.

Yes, you can use balance transfers to pay off debt and in fact, you can use balance transfers to do whatever the heck you want. You could, if you were to be so bold, take the money an invest it in the stock market, fund a new business idea, or just use lit hundred dollar bills to start a campfire. The credit card companies don’t care what you spend that money on… as long as you make regular payments on it. That’s why balance transfer arbitrage works so beautifully!

For the purposes of arbitrage, I would strenuously recommend against using the balance transfer for anything other than to pay off a higher interest debt or stick into a high yield savings account. Investing it is a huge mistake. Spending it on frivolous things is a huge mistake. You want to make debt work for you, not the other way around. So, stick to paying down debt or saving to earn the arbitrage interest - avoid everything else!

If you haven’t heard of FICO 08, then you haven’t been keeping up with the latest credit related news my friend! FICO 08 is the new calculation methodology of the Fair Isaac Corporation in determining your credit score and it will likely lower the credit scores of all balance transfer arbitragers everywhere, with very little you can do about it. Among the things that it changed, many of which aren’t terribly important for the sake of arbitrage, is how it emphasized the negative impact of utilizing too much of your credit limit. That is, starting this year, having a higher percentage of your credit limit used, a hallmark of a balance transfer arbitrager will hurt you more than it did last year.

Also, and less impactful, is a change in how different types of credit lines affect your score. Having a greater variety of credit lines such as auto loans, mortgages, and credit cards; is better than having a lot of credit in a single type. In other words, having a lot of credit via unsecured credit cards is not as good as having a nice mix of auto, mortgage and credit.

How can you adapt? Unfortunately, it doesn’t appear like there’s much you can do to “improve” your score but it still helps to understand the new rules.