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, CitiBank lowered the cash back rebate 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.
Updated January 15, 2013 and originally published March 29, 2007.