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

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.

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.

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.

Let’s say you’ve tapped out all of the 0% balance transfers out there but you still have to scratch that itch, what can you do? The answer is that you can start applying for cards that offer 0% APY for 12 months on purchases and use Google Checkout to convert them to balance transfers. The entire walkthrough on the conversion process is simple so give it a whirl. A word of warning, Google Checkout has no processing fees until February 28th, 2008; after that, this method won’t work.

Please share your experiences if you’ve tried it!

If you recently applied for a Citi card for a balance transfer, consider this tip: transfer an existing Citi credit limit to your new card prior to requesting the balance transfer. Citi currently has an unwritten limit of three or four cards per person and you might run up against that limit if you have any Citi cards. Personally, I had a Citi Professional card from a prior balance transfer, a Citi mtvU card for my personal purchases (it gives you 5% at restaurants and bookstores, Amazon.com counts as a bookstore), and a random Citi card I had just applied for in order to take advantage of a 0% APR no fee balance transfer offer. Well, one more card would represent my maximum of four but I would’ve been better served by consolidating my Citi card accounts. So, I consolidated the limits onto one card.

Why do they do this and why should you? They allow this because they’ve already given you the credit limit, it’s now just a bookkeeping issue when they reduce the number of cards by one. Why should you do this? It increases your credit limit prior to your balance transfer, meaning you have access to more funds than you did before the consolidation!

If you want to fully automate your balance transfer arbitrage play, it makes perfect sense to automate the monthly bill payment process. What’s nice about arbitrage is that the monthly payments are relatively static. Credit card companies often will have a calculated minimum payment of 2% or 4% (4% is generally what is used because credit card companies recently increased min. payment rates in a move to placate Congress). This is great because as the months go by, your monthly payment will go down slightly as your balance goes down, so setting your payment at the beginning of the arbitrage play will ensure you always make your minimum payments.

Let me give you an example, let’s say you get a $10,000 balance transfer from Citi. At 4%, that means in the first month your minimum payment will be $400. In month two, your minimum payment will only be $384 (4$ of $9,600). As the months progress, you will have to pay less and less on your debt because your balance is going down. If you set a monthly bill payment in your bank at $400, you are guaranteed to always pay the minimum amount. If you are so inclined, you can adjust your payment amount every quarter to maximize your interest earned while still keeping a lot of the benefits of an automated solution. And, if you decide you don’t want to, that’s okay because you only surrender a little bit in unearned interest.

By automating the payments, you also have the added benefit of never forgetting a payment! Forgetting a payment can be disastrous as the credit card company can use it as an excuse to end the promotional period and increase your interest rates. That’s an arbitrager’s worst case scenario, so that’s another case for automating.

An App-O-Rama (also abbreviated AOR, or AOR arbitrage) is when you apply for a lot of cards in a very short period of time. It’s a term coined in the finance forums of Fatwallet and one that has since stuck with arbitragers because it’s both catchy and appropriate. The key to an App-O-Rama is that you apply for so many in such a short period of time.

When you apply for credit, the credit card company will request your credit score and history to make a determination of whether they should extend credit. If they decide you are credit worthy, they then decide how much credit to give you. After that determination, they issue you a card for that amount. When a company requests your score and history, it’s recorded as an inquiry on your report. Each inquiry will be reported in a relatively short period of time and the more inquiries the less likely you will receive credit. As you may expect, someone who wants a lot of credit probably shouldn’t be getting it (they may be desperate for money, which is bad for payback prospects, etc.).

By apply for a lot of cards very quickly, you don’t give the credit bureaus an opportunity to catch up with listing those inquiries. That means you are more likely to get those cards and at higher limits, which is key to arbitrage. After you’ve done the arbitrage process once, going through an AOR is the next step if you want to take it to the next level. It’s a scary thought to have twenty credit cards all at once but when you consider you’re earning 4-5% interest on the balances, it’s actually pretty exciting.

Again, there are risks to this as with arbitrage in general. An AOR is not any riskier in the sense that there are more risks, it’s the normal risks with arbitrage simply magnified since the stakes are bigger. Everything that’s positive will be even more positive, everything that’s negative will be even more negative.