The thing about playing the credit card balance transfer “game” is that you have to pay by the credit card companies’ rules—and they can change these rules with very little notice.
On my most-used card, the Citi Dividend Platinum Select Card [aff], CitiBank lowered the cash back rebate to 2% last year, making it more difficult to take advantage of credit card arbitrage.
That wasn’t enough, apparently. It seems CitiBank wants to curb customer profit further. I received this notice in the mail a few days ago:
We are removing the maximum dollar amount on the Transaction Fee for Balance Transfers. This fee will be 3% of the amount of the balance transfer, but not less than $5. This fee is a FINANCE CHARGE.
A $10,000 balance transfer will earn $280 after a year in an HSBC Direct account (if they don’t change rates) assuming you pay off $833 for the next 11 months to pay off the entire balance, and assuming the balance transfer offer is at 0% interest. Of this $280, you’ll get to keep $211 if you’re in a 25% tax bracket. The fee to transfer this balance is $300, so you are actually losing money in this scenario.
The bottom line is that if you have to pay a 3% transfer fee, and you have to pay the balance off within 12 months, there is no scenario in which your interest earned after tax—if your tax rate is anywhere higher than about 5%, and it most likely it is—will exceed the fee. So if you’re going to take advantage of 0% balance transfer offers, find a card that does not have an unlimited transfer fee. Even better would be no fee at all.
The only other option is to find an liquid cash-like account earning guaranteed annual interest significantly more than 5.05%. Good luck.
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Question/quibble regarding your arbitrage strategy-
You mention paying off a $10,000 balance in 12 equal payments of $833. Why don’t you make the minimum payment (2% of the balance) and then make a balloon payment at the end? If you keep the average daily balance higher (via the minimum+balloon strategy) you’ll earn more interest. If I’ve made the right assumptions, almost double.
This, of course, has nothing to do with the new CitiFees or the tax bite.
I may have a serious case of lack-of-sleep going on, but wouldn’t you earn $505 from $10k in an HSBC account in a year (slightly less if you’re paying the monthly minimums out of that total)?
Of course, the cap removal still seriously lowers any potential gains, but at least it’s still a gain:
$505 – 126.25 (aka 25%) => 378.75
$378.75 – 300.00 (transfer fee) => $78.75
Personally, tying up $10k on a credit card to earn $79 is definitely not worth it to me. But then, it wouldn’t be worth it at $379 for me either…
tinyhands: I’ll check your strategy in my spreadsheet later to see how it works out, but that could significantly improve your chances of coming out on top—it didn’t occur to me to make minimum payments plus a balloon payment.
Sean: You wouldn’t earn $505 because you’re paying off the credit card from your savings every month. You could only earn $505 if you kept the entire balance in your savings for the full year.
Ah, it was the lack-o’-sleep thing… I just missed the $833/month paydown. I’ll echo tinyhands -if you’re playing arbitrage, paying it down with equal monthly payments wouldn’t be playing the game effectively.
I got this update to on a couple of my cards. This is for your existing account, and hasn’t changed the actual intro offers yet on most Citi cards.
Also, you can choose to simply decline the change in terms and your current agreement will stay in place for 1 year. After that, they’ll close your card. But if you just wanted the intro offer, you’ll still get all of it.
Also, the interest payments on the credit card should be deductible as investment interest expense on line 13 of Schedule A, assuming that you itemize.