Taking the 0% APR plunge
This is the first in a series of posts on my experiences with credit card arbitrage. See others here: Part 1,Part 2 ,Part 3, Part 4, Part 5, Part 6, Part 7
A few weeks ago I explored financing a car loan on a 0% apr credit card offer[see post here]. My conclusion at the time was that any balance transfer fee made the deal not worth while for me. Well USAA was gracious enough to send me a credit card offer for 0% APR for 12 months and no balance transfer fee for transfers within the first 60 days. This changes the rules of the game and so I enter the world of credit card arbitrage.
I checked over the paper work for key points: 0% intro APR for up to 12 months, no annual fee, no balance transfer fee or cash advance fee. So today I went ahead and accepted the offer. They gave me a credit limit of $18,000 once I activate the card. My plan is to take a cash advance of $16,000. A portion will go to paying off my car loan, and the rest will go to my ING savings account. I'm putting it there for two reasons. First, it will be separate from my other savings accounts. This money can only be touched in extreme emergency, because failure to pay it all back before the 0% APR expires results in heavy interest changes being levied. Second, ING is running a 3.30% offer on CD's right now, which is hard to beat for a safe investment. Taking out a 9 month CD will ensure that I get maximal returns while maintaining liquidity.
Here is how the numbers break down: (The top row are my assumptions)
| Savings | Car Loan | ||||||
| Credit Card Loan amount | Minimum Monthly Payment | Savings Interest Rate | Car loan payoff amount | Interest Rate | Monthly payment | ||
| $16,000.00 | $100.00 | 3.30% | $3,100.00 | 3.90% | $662.00 | ||
| Month | Savings Amount | Interest Earned | CC Loan Remaining | Savings Loan Difference | Car Loan remaining | Loan interest | |
| May | 1 | $12,900.00 | $0.00 | $16,000.00 | -$3,100.00 | $3,100.00 | $10.08 |
| June | 2 | $13,462.00 | $35.48 | $15,900.00 | -$2,438.00 | $2,448.08 | $7.96 |
| July | 3 | $14,059.48 | $37.02 | $15,800.00 | -$1,740.53 | $1,794.03 | $5.83 |
| August | 4 | $14,658.50 | $38.66 | $15,700.00 | -$1,041.50 | $1,137.86 | $3.70 |
| September | 5 | $15,259.16 | $40.31 | $15,600.00 | -$340.84 | $479.56 | $1.56 |
| October | 6 | $15,679.03 | $41.96 | $15,500.00 | $179.03 | 0 | 0 |
| Novermber | 7 | $15,620.99 | $43.12 | $15,400.00 | $220.99 | ||
| December | 8 | $15,564.11 | $42.96 | $15,300.00 | $264.11 | Total Int | $29.12 |
| Januar | 9 | $15,507.07 | $42.80 | $15,200.00 | $307.07 | ||
| February | 10 | $15,449.87 | $42.64 | $15,100.00 | $349.87 | ||
| March | 11 | $15,392.51 | $42.49 | $15,000.00 | $392.51 | ||
| Sum | $407.44 | Combined interest saved and earned | |||||
| $436.56 |
As you can see, I should make about $400 on the deal including interest that I will not have to pay. I'm using only 11 months and a 3% interest rate to be conservative. There will be "inefficiencies" such as not being able to utilize the full 12 months (since my intro period starts today but I can't really use it until my card is fully activated, early payback, etc.), interest lost while money is in transit, and other things that I may not be considering. If interest rates go up or down that could change the whole scenario. Four hundred dollars isn't much, but it's more than I expect to make from credit card cash back and my other savings accounts combined. My only investments right now that will earn more from are my lending club loans at 14% interest and possibly dividends from stocks/mutual funds that I own.
To find out more about credit card arbitrage check out these blogs: MyMoneyblog and MyDollarPlan . MyMoneyblog has about $27,000 in 0% debt. MyDollarPlan has a credit limit over 1,000,000 and about $200,000 in 0% APR offers. How she does it is simply amazing( and probably very nerve racking as well).
I received a discover motiva card offer in the mail yesterday. It had some interesting terms, 3.9% until 2012, 4% transfer fee - pretty steep. The numbers I ran saw just under $20 dollars in savings per month if I transferred my car loan to it.
Posted by: joey b. | May 19, 2008 at 06:37 AM
Good luck! Keep us posted on how it goes. Also, don't forget to figure the taxes on the interest you earn at ING into your equation.
Posted by: My Dollar Plan | May 20, 2008 at 07:51 PM
Thanks MyDollarPlan. I don't normally consider the tax side of things because I have to pay taxes on all my income(except TSP contributions). You have to have income to pay taxes on it : ). On the flip side, money you do not pay, like interest saved on a car loan, is almost like earning money tax free.
Posted by: Step 3 | May 20, 2008 at 09:35 PM