Banks Dropping Interest Rates, Still Worth Arbitraging?
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.