0% balance transfers
In a few months, I plan to start arbitraging the 0% balance transfer offers from different credit cards. I've seen it mentioned on several different personal finance blogs and I'll make sure to read through the fine print. I have one such offer right now, but the purpose of that one was to consolidate some existing credit card debt to one card and to aggresively pay that down. So far my wife and I have paid zero interest on the cards we have. The only interest we pay is on our mortgage (5/1 ARM), our car loan, and my student loans. All of these loans have an interest rate of less than 5%, so I'm not in any particular hurry to pay them down yet. We do have an ARM, but we plan on moving before it starts resetting annually. So far, so good.
One thing I wanted to check was how much we would be making with such an offer. Since these balance transfer usually require a minimum payment (around 2%) every month, that cuts in to the amount of free money we'd make. As usual, I went to excel to find out the answer. My results are below:
CC bal xsfer $14,000 CC minimum 2.00% bank APY 4.00% daily periodic rate 0.01% Month # days Interest Earned Curr Bal Minimum Ending Bal Jan 31 $46.71 $14,046.71 $280.00 $13,766.71 Feb 28 $41.48 $13,808.20 $280.00 $13,528.20 Mar 31 $45.14 $13,573.33 $280.00 $13,293.33 Apr 30 $42.92 $13,336.26 $280.00 $13,056.26 May 31 $43.56 $13,099.82 $280.00 $12,819.82 Jun 30 $41.39 $12,861.21 $280.00 $12,581.21 Jul 31 $41.98 $12,623.19 $280.00 $12,343.19 Aug 31 $41.18 $12,384.38 $280.00 $12,104.38 Sep 30 $39.08 $12,143.46 $280.00 $11,863.46 Oct 31 $39.58 $11,903.04 $280.00 $11,623.04 Nov 30 $37.53 $11,660.57 $280.00 $11,380.57 Dec 31 $37.97 $11,418.54 $280.00 $11,138.54 Total 365 $498.54 #N/A #N/A #N/A Effective APY 3.56%
Everything in orange are input variables to tweak to different assumptions. So it turns out that the effective APY for this arbitrage is 3.56%. Not bad. I'd only lose .46% (46 basis points for those in the finance world) in paying the monthly minimum.
I wanted to make at least $1,000 in interest, but that required around $30,000 in CC debt and my wife wasn't too comfortable with that. So we compromised at around $500. In reality, I'd expect that ending total to be a little less, because knowing us, we'd forgo some of the interest to pay the balance off a couple weeks early (not too early though). Hope that helps some people who are contemplating this move as well.
Also, just so you know, here are the effective APYs for various required minimum payments:
2% 3.56%
3% 3.34%
4% 3.12%
5% 2.90%
At a 5% minimum payment, you're only going to be making 2.90%. I'd stop there, as anything more is going to reduce it so that it isn't really worth it (for me at least).
10:29 AM
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4 comments:
How many cards are you planning to open? If you have a high credit limit, it would be a lot easier to borrow a larger amount. Remember to open them all at once. Also, the more cards you have, the more more work there is involved in paying the monthly minimum.
If you don't want to hurt your credit score, keep your utilization below 50%, if you don't care, then max it out.
I like it!
You are lucky you have such a good credit history to have such deals. Very often the whole thing with 0% balance transfer is a lot of fuss and very limited results.
If you research the credit card offers available in todays market then you will keep on doing that one for life. The best way to do that is to seek the reference of friends and relatives. All the best
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