Quick definition for you
Credit Card Arbitrage: The act of taking low interest rate balance transfers from your credit card company in cash and investing it into money-making ventures like CDs, money market accounts and (gasp!) even the stock market.
I want to warn you right off the bat, though, that you should only put the money into accounts that are guaranteed to earn more interest income than what you’re paying for the balance transfer. That means don’t invest it in the stock market! You could end up in the red and owe more money than you withdrew in the first place.
Inspecting a problem, getting a wad of cash
Earlier this month (July), I noticed a $0.00 charge on my Citibank credit card statement just identified as “Membership Fee July 08 – June 09“. Even though it was $0, I wanted to make sure it wasn’t some sleaze phishing for active credit card accounts, so I called Citibank. I found out quickly that it was from Citibank directly, and they do this “for every card, even if there is no annual fee”. Seems a waste of their resources to bill people for nothing and then field calls asking what it’s for, but Ok.
But while on the phone, the account representative informed me that “I had a special offer of a 0% balance transfer offer with a 3% fee or a max of $75“. First, most credit cards have removed the caps on their transfers because they knew people with good credit were just withdrawing the money and sticking in the bank. They were losing money on the deal!
But the next statement really caught me off guard. It went something like this:
You can use the money to pay off another balance, to take a vacation, to pay tuition or even just stick it in a high-interest bank account“
WOW! They’re now promoting credit card arbitrage! Or at least this rep was.
So I took the money. It’s 0% until March 1, 2009, so about a 7 month deal once you take out the time to get/cash the check, deposit it, then pay the money back at the end of the term.
But before I took the money, I asked for a credit line increase. It was previously at about $12,000, but I got him to bump it up to $13,400 without dinging my credit score. And instead of taking out ALL of the balance, I left a $900 buffer and only took $12,500. It’ll still ding my credit, but I don’t have plans anytime soon to refinance the house or get another loan.
What will we do with the money
I will admit up front that I agreed to taking the money without any real plans for it. That’s counter to the last time I took out a major chunk of cash. The last time was early 2007 when I took out $15,000 to pay the Chevy Malibu off early. I planned that whole activity in advance and created an aggressive repayment schedule (which worked excellently).
This time, though, I have the following options:
- Throw it all towards the truck loan to avoid paying interest: This idea has merits, but unfortunately, we wouldn’t pay off the entire loan with the $12,500 (unlike with the Malibu), and we would be committed to paying off that whole amount in 7 months when we have a big vacation, Christmas and tuition coming up.
- Buy a bunch of useless crap: Yeah, I had to throw this one in there. I’m still really tempted to go get a big TV, or new furniture or numerous other things that we don’t need, but I’m resisting!
- Stick it in our ING Orange Savings account: Even though ING Direct doesn’t have the highest rates (currently 3.0% APY) compared to eTrade Max Savings (3.3%) or HSBC Direct (3.5%), we already have the account so it’s convenient. I tried chasing rates before and I didn’t care for it. We could earn about $220 in interest this way.
- Stick it in a 6-month CD: Using Bankrate.com, I see the highest 6-month CDs are sitting around 3.60%. It’s more money than the 3% from ING Direct. I could just open an HSBC Direct account, get close to the same rate and have a more liquid account.
So ultimately, I think we’ll just stick the money into our savings account and have it earn us money. We’ll earn more than the $75 we paid for the transfer while still having the money if we have to pay it off earlier (no idea why we would need to though). It’s a nice idea to pay down the truck more quickly, but it’s just exchanging debt for debt (and credit card is the worst debt anyway!).