Step3 Prophet

Forgotton Rewards

  I was updating my monthly finances when I realized that I have a lot of rewards points on my Chase credit card. I use rewards cards to earn cash back on purchases, and since it takes a while to accumulate enough points for something meaningful I don't usually think about them, but the balance caught my eye and I was taken aback.

  I prefer cash back, as opposed to miles or gift cards or some other reward,  because cash is useful for every transaction and it's usually clear what you're getting for your points. My Chase card is a 100 points to 1 dollar conversion, so it's very simple. My USAA card is a bit trickier because if you convert a small point balance, you don't get as much. For small balances it's a 100:0.83 ratio. You need 20000pts for it to be a 100:1 conversion. I'm not quite to 20000pts at USAA yet, which is another reason I've been ignoring the point balance for so long. When I went to convert my Chase points to cash I checked out the other deals on their rewards site as well, but all the rewards were the same point to dollar value, so I'm taking the cash.

If you're not using a rewards type credit card I highly recommend it. It's like finding several hundred dollar bills in your pocket you didn't know you had.

Free Credit Report After Buying Insurance

I got a Piaggio MP3 motorcycle to commute to work and have some fun. As part of the process I had to get insurance. Normally I use USAA for most banking and insurance items, but motorcycles are not covered directly by them and USAA has a deal with Progressive to cover motorcycle operators. Turns out motorcycle insurance is relatively cheap, but I didn't get the best rate according to Progressive because of items in my credit report. Progressive was nice enough to spell out in detail what factors went into their calculations, and because I didn't get the best rate I'm entitled to a free credit report from Experian.

My overall insurance score was 96. Apparently lower is better, and everyone starts with 100. I was given acknowledgement for having no late payments in the past seven years, and having a credit account at least 7 years old. The lack late payments was by far the bigger factor. I was deducted points for having a credit application within the last 700 days and opening a revolving account in the last year. Applying for credit is by far the biggest factor, but what affronts me is the time periods they look back. Seven hundred days is a long time to look back at credit applications. I have 10 credit accounts in good standing, which means I apply for credit about once a year, whereas they want no more than 1 every two years. When it comes to actually opening accounts, they look back 8 years at revolving credit accounts. Given that I opened my latest revolving credit account only 2 months ago to take advantage of a 0% APR offer, this wasn't a very big hit. Everything in the report about me is accurate, but it seems a little odd. Progressive also gave some interesting statistics for recent "average" insurance customers:

Credit Info	Averages
Number of open, satisfactory accounts:	4
Months since opening most recent account	11
Years since earliest open credit account	10
Number of collection accounts	2
Months since most recent past due payment	7
Most days any payment was past due in last 7 years	2
Number of days since most recent application for credit	161

The statement from Progressive compared my data to the averages. They made it clear they got their info from Experian, and gave details on how to contact them about my credit report.

It's been a while since I've looked at my credit report so I'm not going to pass up the chance to get it now for free. I could get it for free from www.annualcreditreport.com, but why waste my yearly opportunity. I went to Experian's website looking for a way to simply get a credit report, but I could not find it. The whole website is a total up-sell for their useless products and services. 

Luckily the information from Progressive also had a phone number I could call to find information about my free credit report. Calling that number resulted in me being directed back to the website, but to another page. The location for just seeing your credit report is the Credit Report Access page. There was a little bit of up-sell here, but I was able to get where I needed to go. The downside is that I couldn't access it online that same day. Experian is going to mail me an access code for "security purposes". Whenever I use annualcreditreport.com I get the report  right away, so this seems like something else is going on. I'll post an update once I actually get the report.

Lending Club Numbers Revisited

  In 2008 I did a post on expected returns from using the Peer to Peer loan service Lending Club. It's been just over a year now, so what better time to take a look at the results? (Thanks mike for the comment on my other post).
  I'll come out and state right now, it's not as rosy as my initial assessment led me to believe(O RLY?). Much as the initial Propser investors took a beating, so have my first LC investments. I made the post when LC was still getting started, and there was a lack of historical data at that time, so I used the historical data for traditional loans that LC had on their website. Also, I wasn't as savvy about how to invest in loans at that time. Now you can take the historical data that they post on the LC website and do calcs with actual results. Interestingly enough, LC quite period last year provides a clear demarcation between my old and new loan strategies. But enough chat, here is a screen shot of my portfolio of "Old Notes".
 

Click to enlarge the image if you can't read it. It shows that of my 225 original loans, 10 are charged off, 16 are in default, and If you count those 1-4 months late as defaults, then that is 38 loans total in default. That makes almost 17% defaults. That's not terrible, but keep in mind that this is only after 1 year. These are three year loans, so most have about 2 years left to be fully paid. Also not that good either, since my original calcs show give a annual rate of return of around -1%.

  So how am I actually doing? If you look at the interest earned versus the defaulted amount, it's a net gain for me, but not by much. About $1029 defaulted, compared to $1,133 in interest payments gives me a prophet so far of $104 You can slice that value a number of ways, but since the payment/default process is still on going, and I don't want to delve into statistics tonight, I'll just leave it at that. The reason I have a profit vice the loss my original calcs showed is due to the assumptions made(ie, the loan defaults at origination, and all loans are of equal value). My actual portfolio is not homogeneous, and, of course, not all loans default right away.
  What this really means to me is that I'm not being adequatly compensated for risk(ie the interest rates on high risk borrowers is too low). Lending Club's interest rate model assigns an interest rate based on a number of risk factors, but I suspect that the for the D,E,F,G category notes that interest rate is too low. It's a tough choice, because if LC sets the rate too high, poor credit loanee's will not even apply. Plus I don't want to gouge people, I want to help them out of those high interest credit cards or bills. Some of it is also my fault for not being careful how I invested in the those old notes.
  So what can a person who wants to invest in do to mitigate the risks? First, only invest the minimum amount in any particular loan. This allows for greater loan diversity, and minimizes the chance that one loan going bad sinks your whole portfolio. I actually have a loan like that in my old notes. Thankfully the borrower has proved to be trustworthy so far, but I will never again go out on a limb for a single borrower, no matter how good there profile looks. The fact is, you can't really know the borrowers situation, or even if you do, it could change during the 3 years of the loan.
  Second, weight your portfolio toward the A,B, and C categories. You don't have to limit yourself soley to them, but the compensation isn't there for a large portfolio of low grade loans. Here is a snap shot of my current "new" note portfolio.

Most of the loans are about 3 months old, so there is not much of a history yet. This newer portfolio is definatly more risk averse, but by following the two principles outlined above I think my overall yield will be much better.

Home ownership vs Renting

(Image by CracklinTulip via Flickr) I hate paying money to borrow money. The only reason I did it for a car loan was because I could limit the interest payed to around $1000 total over the course of the loan(This was a $22000 loan). Quite frankly, the interest you pay on a home mortgage scares me. For a $200,000 mortgage you could easily pay $200,000+ in interest fees to the bank. If your interest rate was 5.3%, that would almost exactly be $200,000 paid in interest over the course of the loan. The flip side of this argument is that if you rent, you are throwing your money away each month. So I decided to do a spread sheet on rent vs own.

Of course, when you consider home ownership, there are many factors that go into the equation. So many in fact that my calculations may not mean alot to you over all. Too much is dependent on your local market conditions and your choice of lifestyle. To keep it simple I'm not going to look at too many variables.

I choose to use a $200,000 mortgage, at 7% interest, for 30 years, with various appreciation rates considered. Also taken into consideration is taxes, fees, and maintenance that the house will require over those 30 years that a renter wouldn't have to pay(such as replacing carpet or the roof). At the other end of the spectrum you have rent. You can rent a comparable home in my area for $900 a month. Since rent is not an investment, the only way you can possibly come out ahead in this deal is to invest the difference between the cost of home ownership and your rent. Here is a summary of my finding about home ownership. 

Mortgage		Term	Taxes/fees/ maintenance
$200,000		30 years	over 30 yrs	$168,255
Monthly Payment		Loan Interest Rate
$1,330		7%
Total Interest		Total Cost
$279,000		$479,000
		Yearly Appreciation
		5%	4%	3%
Start Value		$200,000	$200,000	$200,000
End Value		$864,388	$648,680	$485,452
Gain		$217,134	$1,425	$(161,802)
Seller fees		$51,863	$38,921	$29,127
6.00%
Net Sale Profit		$644,270	$441,504	$288,071

End value is the value of the house due solely to appreciation. Gain is the end value, minus costs of home ownership and money that you paid in interest and priciple. The table shows that for a 3% appreciation rate, you will actually have less money than what you paid in. However, you are still left with an asset worth a sizable amount. The net sale profit is the End value minus cost of home ownership and sellers fees. As you can see, a 5% appreciation rate leaves you with a very nice profit. So then the question become, what could I make if I had rented a home and invested the difference between mortgage/upkeep cost and rent payment?

Initial Rent (monthly)	$900
Appreciation	3.00%
Final rent (monthly)	$2,121
Diff. invested over
30 years@ 7%	$523,189

I assumed that rent increased at a rate of 3% per year. Otherwise the steady difference between a mortgage payment/upkeep costs versus rent would definitely out weigh the house appreciation. Since this was a long term investment, I gave it a 7% appreciation rate, which should be about right if you invest the difference in stocks. You pretty much have to invest in stocks if you want to compete with home appreciation. If you invested in a MM account at 3%, then even the lowest home appreciation rate would beat your investment.

In the end, investing the difference adds up to a pretty sizable amount. You would still come out ahead if your home appreciated at a rate of 5% according to my scenario. But again, there are many factors to consider. Here is my spreadsheet with all the details if you want to play around with it yourself: Download Home vs rent calc

Since the historic rate of home appreciation seems to be 5%, you may actually be better off buying. Even with the housing market slowing down in the U.S. now, over a 30 year period it should correct to the historic average. Of course, if you are going to be moving around frequently( therefore buying and selling homes), that would also eat into your gains pretty quickly.

For my current situation, renting makes more sense. If you are going to stay in an area for 30 years, then buying will probably be your best investment, even if the cost of interest is more than the purchase price of the house. 

0% APR arbitrage part 7

This is the Seventh 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

My convenience checks to my own checking account cleared yesterday. So now I have a fat stack of cash sitting in my checking account. I would like to move it all at once to my HSBC account because at the moment they are offering a 3.5% interest rate on savings, but I ran afoul of USAA's outside transfer limit of $5000 per day. This was kinda of silly because I was pushing from USAA to HSBC, so USAA "knew" I had the cash. Regardless, I'll have to do the transfer in 3 steps over 3 days. That will be something to consider when it comes time to pay off the full credit balance as well. Judging by how difficult it was to convert the credit line to cash, I think when it comes time to pay it off I'll get a new card with 0% APR and just do a balance transfer to that card instead.

0% APR arbitrage part 6

This is the sixth 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

I called USAA today. This was an ordeal in itself. I've had trouble getting a hold of them after 6pm, despite their website clearly stating that they have customer service reps available to 8pm, all continental time zones. I'd previously emailed them and complained of this, so when I couldn't get a hold of anyone tonight I went back and looked at their reply. That message contained a different phone number to try, and so I used it and got in touch with their web site support service. I was talking to a person, so that was progress there. She made a comment that leads me to believe that it was my phone number that prevented me from contacting a service rep initially. I have a Dallas cell phone area code, even though I'm living in Seattle. Since it's past 8pm in Texas, thats probably why I couldn't get through.

I finally got in touch with credit card rep. I asked how long my offer was still good for and if there were any limits on convenience checks. She said the offer was good from the date of the application, which is kinda of lame because you can't use your credit until you activate the card, and that wasn't until 10 days later. That still gives me about 4 weeks to make the most of this offer.

Interestingly, when I told her of my plan to post the check to my own checking account, she said this was a good idea. Since the convenience checks are essentially the same as cash, you don't have the same legal recourses that you would if you had problems with a bank check. So tomorrow I'm going drop two checks in a postal drop box, which conveniently gets rid of something that is the same a cash just lying around my house. I don't really like putting something like this in my mail box where anyone could pick it up, so thats why I'm putting it in the post drop outside a bank near where I live. More to come. 

0% APR part 5

This is the fifth 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

The finance charge that I got was related to the cash advance after all. To ensure that I minimized the damage, I executed Plan B from post 4, which was to pay back all the money that was borrowed. I was reluctant to do this because it dips into my emergency cash fund, but keeping the $2500 cash advance at 7% interest would be devastating to the small returns I'm expecting from this venture. I really should have verified that the cash advances were or were not covered before I payed off my car loan, but live and learn. Since a credit card company will apply any payments made to the lowest APRs first, paying everything back was the only way to avoid future finance charges. Actaully, I still expect some future finance charges because I carried the balance for a few weeks while checks were clearing.

So as of right now, I'm back at square one. Zero credit card and loan debt, but not very much money in savings either. My plan of action now is to call USAA tomorrow, verify how long the fee waiver and 0 APR is still good for on convenience checks, and if there is enough time remaining, send in two checks to myself for a total of $15000. I'm thinking two check would be easier because any amount over $10000 draws attention. I should still have plenty of time since the offer was for 60 days, and I applied on May 18th. If I execute this plan, I may still have to pay a minimal finance charge on the finance charges that I accrued on the money I paid off. This should be only on the order of a dollar a month.

0% APR update (part 4)

This is the fourth 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

First the good news: I got a check form Amex in the mail today for the amount of my positive balance. I tried to deposit it online but ran afoul of $5K deposit limits. I'll mail it in tomorrow.

The bad news is that a finance charge occurred. I'm not really sure why, so I called customer service. Actually, I emailed them. They've been good to me in the past so I hope this can be resolved easily. Hope is not a strategy however, and if I can't get the finance charge revoked there is always Plan B.

Plan B is to repay all the money borrowed once the check from Amex clears, and try again to take advantage of the 0% APR offer once I figure what I did wrong. I still should have at least 30 days. It will take some cash form my cash cushion to accomplish the pay off, but I will be worth it. This could be considered a fiscal emergency right? 

I suspect the finance charge is related to the cash advance I took for $2500 to pay off the car. A balance transfer and a convenience check are basically cash advances as well, so I don't know why it should be different. Pretty much every credit card company puts payments toward the lowest APR first, so I would have to payback everything borrowed to actually eliminate future finance charges.

0% APR part 3

This is the third 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

My credit card balance transfer from USAA to AMEX went through today. It was an automatic payment after all so no time lost on in the mail there. My AMEX account showed a positive balance of just under $9500, because a Netflix auto payment had gone though on this card as well. I looked around on the website and could not find any way to get a check back automatically, but I had not expected it to be that easy. From MyMoneyBlog I knew I would have to call them to get them to issue a refund check. I called Customer Service, and spoke to the rep. She was surprised at the balance, and possibly a little flustered. She said she was "surprised that they let this go through." I bet she suspected fraud, because she put me on hold for about 5 minutes and them came back and told me I would be getting a letter in 7-10 days regarding my refund request. She was also kind enough to give me a case number. So more time and interest will be lost in the mail after all. Maybe I should have just requested convenience checks.

0% APR update

This is the second 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

Last week I decided to take advantage of a 0% APR credit card offer. Today I finally got my card. I went to the website and was easily able to activate it online. Then I stared trying to figure out how to turn the credit into cash. My initial plan was to just take a cash advance for the amount I wanted and have it post directly to my checking account. Sadly, it was not that easy.

USAA has a limit of 2500.00 on cash advances. I'm not sure if that is just my account, or an across the board limit. So I had to come up with a new plan of action. I decided that I would take the cash advance anyway and use it to pay off the rest of my car loan, making up the difference with my disposable cash. In this manner I stop paying more interest on my car loan almost right away. I made a payoff payment for today, which might have been foolish, because when I got to the final screen it said my payment would post to my loan account tomorrow. If it doesn't work out right, I may have some change left over in the account due to interest accumulation. I intend to keep an eye on it and see if the loan is fully paid off or not.

On a side note, USAA had an option under my car loan account to "pay using a line of credit". When I tried to access that option, it took me to the standard money transfer page, which doesn't access my credit accounts or my car loan. Very strange. If someone knows why they do that I'd like to know.

To take advantage of the rest of the limit I used the balance transfer technique. Some creditors will cut you a check directly, but the online forms wanted another credit card company to transfer the money to. You need a bill from that company that shows their mailing address. You enter in the company name, the address, how much you want to transfer, and USAA takes it from there. I decided to transfer the funds to my other Amex card. Once the transfer takes place, I will have a positive balance on my Amex card and will call them to request a check. Thanks to Mymoneyblog for this technique. The downside is that there will be a lot of snail mail and online transfer time. It looks something like this USAA ---> Amex ----> Me ----> USAA  ---> ING. Conveniently enough, USAA is based in San Antonio and my Amex P.O. Box is in Dallas, so hopefully that will be a short leg.

I'm also going to see if I can make another cash advance. Or maybe get convenience checks. While normally there are high fees associate with "convenience" checks, during the first 60 days they should all be free. I'll be watching closely to make sure that is the case.