Balance Transfer Arbitrage

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.

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!

Not everyone can get a 0% APR balance transfer, it’s a fact of life. If your credit isn’t stellar or you have too much credit already, credit card companies may not be willing to extend to you any of that juicy 0% offer because, frankly, you’re too risky. They know that no one else will offer you a 0% balance transfer so they aren’t going to either, but they will offer you something that’s a little worse than 0% - like 7.99%. 7.99% is great if you’re goal is to reduce the interest rate of your loans, it’s awful if you’re trying to find a 0% arbitrage funding source because you can’t get 7.99% guaranteed from anywhere.

So, what should you do? Improve your credit. Research online to see what you can do to improve your credit because that’s the only way the credit card companies are going to give you any decent offers. They aren’t in the business of giving credit to anyone and everyone, they want to give it to people they can trust to pay it back and people they can earn money from - you want to be extended credit because you’re in category 1 (trust).

Some quick tips for improving your credit are to reduce your utilization (how much of your total credit limit you currently owe), make your payments on time, and simply wait. There are other ways to improve it but ultimately those ones are the main ingredients. Sometimes you don’t have enough history, sometimes you are borrowing too much, sometimes it’s something else - all of it improves with time as long as you keep paying.

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!

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?

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.

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.

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.