Balance Transfer Arbitrage

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.