Balance Transfer Arbitrage

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.

Have you thought about a balance transfer arbitrage play but don’t know what to do exactly and not willing to go blind on it the first time? It’s really simple and I’ll give you an idea of what you need to do by explaining my latest 0% balance transfer arbitrage play with the Citi Professional card. Why the Citi Professional card?

• Decently large starting credit limits.
• Citi has an easy balance transfer request process.
• $100 gift card after first purchase, a nice little bonus.

So, let’s walkthrough this one and the rest will be very similar.

1. First, apply for the Citi Professional card.
2. After the card arrives, make a purchase.
3. Wait until the next bill, pay it off in full. Request your gift card at your leisure, those points aren’t going anywhere.
4. Next, make a balance transfer request by following this walkthrough of the Citi balance transfer process.
5. When the check arrives, deposit it into your bank account. Now you can either use it to pay off another debt or use it to earn some money.
6. Transfer the funds into a high yield savings account such as ING Direct.
7. Remember to make those monthly payments either by making payments automatic or by just remaining diligent. Don’t forget!

That’s it, wasn’t that simple?

Each balance offer has five (and a half) core parts, each of which are crucial for the balance transfer arbitrager (or someone looking for a break in interest payments):

• 1. (Promotional) Interest rate
• 2. Period of (promotional) interest rate
• 3. Payment methods
• 4. Universal default clause
• 5. Balance transfer fees
• 5.5. Application bonuses

Interest Rate is a bit of a no brainer, if you’re a balance transfer arbitrager then I would argue that if it’s not 0% then you don’t want to deal with it. There are a ton of 0% balance transfer cards out there and if you’ve exhausted each and every one of them, then kudos to you because that’s a lot of credit cards. If you are taking a break from interest and you’re carrying credit card debt, then anything less than what you’re paying now is a win for you. However, if it’s not zero, keep that number in mind.

Period of promotional interest rate is another key point for arbitragers, 12 months is again really the best minimum number of months for it to be worth your while. You don’t want to get a 6 month offer and deal with such a short time period unless you’ve tapped out all the year long offers. If you’re paying off debt and want a breather, I would offer up the same advice that 12 is better (duh) unless you’ve gone through all those offers.

Payment methods is something that bears mentioning because there are a lot of companies offering these balance transfer terms and some are larger than others. This isn’t a concern for the likes of Discover, Citi, Bank of America, Chase, or Capital One because they let you link up a bank or otherwise make online/electronic billpay a cinch. It’s those smaller companies you have to double check, having to mail out a 41 cent envelope with a check only adds to your costs and introduces ways you can mess up.

Universal default clause was popular with cards and then suddenly unpopular. Universal default is when they change your credit terms because you missed a payment elsewhere, even if it was not credit related in the traditional sense. Miss a cell phone bill? Company might jack up your rates. You want a card without this clause. Most major card issuers have dropped it but it pays to check.

Balance transfer fees, especially when you’re an arbitrager, only adds to the interest rate. If the fee is 3% and the promotional period is one year with 0% APY, you’re essentially paying 3% interest on the loan (it’s actually more because you’re paying it up front instead of spread out over 12 months on a balance that’s slowly shrinking). The no fee balance transfer has fallen out of favor lately but there are still a few left out there if you look card enough. Some issuers cap the fees at a dollar amount, say $75, so it’s not truly a % number but potentially less.

Application promotions are those promotions where you can get a gift card with your first purchase. I call it half a part because it’s really like icing on the cake and only serves to bubble that offer up to the top. If you do make a purchase, pay it off entirely before you start the balance transfer because companies will apply your payments to the lowest interest rate first. That means you could be carrying a $5 sandwich for twelve months at the prevailing interest rate if you’re not careful. It won’t cost you a lot but it’ll eat into those bank interest profits you’re after.

If you can get a no fee 0% balance transfer, every single arbitrage play is worth it because the money you’re getting is free. What about when the interest rate is above 0% or if the 0% balance transfer has a fee? That’s when you need to start doing some math and seeing whether all the time will be worth it. Let’s take each scenario separately and see what you need to do to evaluate the suitability of the offer.

In the analysis below, I’ll be using a lot of math rounding that you’ll recognize if you’ve done this before. I do this out of simplicity’s sake and recognize that the amounts I quote as you being able to “earn” is really a ceiling value. When you take out a balance transfer for $5,000 for 12 months, you will be paying down that balance every single month by your minimum payment. Calculating your earnings for the year on that $5,000 isn’t as simple as multiplying it by 5%, you should treat it as 12 separate calculations as you pay down the debt. Again, I recognize this and take the simple route simply because it’s good enough for our purposes. So, when I say you’re earning $50, I really mean that you’re earning something less than that.

Balance Transfer Fee
First, you need to evaluate how much of a fee there is on your 0% balance transfer. Most cards will have a 3% balance transfer fee with a minimum and maximum fee. Some cards will not have a maximum fee. In the case where you don’t have a maximum fee, then you’re basically earning the difference between your bank’s interest rate and the fee percentage, minus your taxes. So, if you can get 5% from your bank, pay a 3% fee, and you’re in the 25% marginal tax bracket, that’s 1.5% earnings for you. That means if you get a $5,000 credit limit, you’re talking about earning $75 for your trouble versus $250 if there were no fee.

Let’s say that the card has a maximum fee of $75 (a very popular one), well then it’s effectively 3% if you have a credit limit under $2,500. If you think you can get a credit limit above $2,500, then that drops your effective debt interest rate. If you get a credit limit of $5,000, pay a $75 transfer fee, then you’re really paying a 1.5% balance transfer fee.

Higher Than 0% APR
This is analogous to having a fee except it’s extracted each month instead of right off the top. Since we’re simplifying the math, it’s really just like the balance transfer fee scenario. In reality, you earn more money from an offer that has a higher than X% APR than an offer of 0% APR and a X% balance transfer fee.

I hope that helps you in understanding how to evaluate the various balance transfer offers out there.

There are three steps to a successful balance transfer arbitrage:

1. Step 1: Apply for and be accepted for unsecured credit. In our case, this will be an unsecured credit card.
2. Step 2: Open a high yield savings account at a bank such as ING Direct.
3. Step 3: Request a balance transfer from your unsecured credit card and deposit it to your high yield savings account.

There you go, the three simple steps to balance transfer arbitrage.

Now, there are caveats that you must adhere to if you want this to be a profitable venture. Here are some basic rules to balance transfer arbitrage.

• Your interest rate for the balance transfer must be less than the interest rate of the savings account, otherwise you’ll be losing money.
• When considering balance transfer offers, you must take into account any balance transfer fees. A no fee 0% interest balance transfer is the ideal line of credit and they are plentiful, so unless you exhaust all those avenues you should be getting a no fee 0% balance transfer.
• You must not deviate from the three steps above. Do not use the credit for anything else such as a new television. Do not put the credit at risk by trying to get more in interest, such as by putting it into the stock market.
• Be diligent and remember when the balance transfer promotional interest rate will expire and pay off the debt before any interest is assessed. A month of high interest can put a significant damper on your arbitrage play.

Balance transfer arbitrage is very easy and very safe if you follow those simple rules. If you decide you want to outsmart the system, that’s when you get into trouble.

If you can ever borrow money and then earn more “interest” than what you’re paying out to service that loan, then you’ve made yourself some money. In the real world, it’s called business. Someone takes out a loan, starts a business, and, ideally, makes more money operating the business than they pay out servicing the loan. In an real world, you can guarantee the loan’s interest rate but you usually can’t guarantee the amount you can earn off that loan… until today.

The beauty of balance transfer arbitrage is in its simplicity because it requires absolutely nothing special, other than the ability get unsecured credit cards from companies like Citi. Balance transfer arbitrage is the practice of applying for a 0% balance transfer and depositing the funds in a high yield savings account, earning money on difference. The arbitrage refers to the spread between the 0% loan, in this case the balance transfer, and the yield on the high yield savings account, which at a bank such as Emigrant Direct is 5.05%. Arbitrage also refers to the nearly guaranteed nature of the deal because of the parties you’re dealing with, the credit card company and the bank.

So, are you ready for balance transfer arbitrage?