0% APR Arbitrage
I struggle to file this under the "Financial Planning" category, because this certainly isn't something I would recommend to a client, but... following the lead of MM (here and here), I decided to try my hand at leveraging my credit score in order to get money at 0% from a credit card issuer (in this case Citi was the best offer) and invest it.
The Citibank PremierPass Card is a great 0% APR deal where you get until December 2006 (that's what I got) interest and fee free on balance transfers. I happened to get the free offers in the mail for both my wife and me on the same day. I applied for both after checking the terms. She was approved for $7500 and I was approved for $8500.
Stepping back, I had evaluated both our credit scores using the Experian-sponsored Credit Expert site last year. My score was 771 and hers was 723. We haven't opened any other credit and we're not applying for a mortgage or car loan within the next year. This means I have room to play without hurting us.
I confirmed and reconfirmed all the terms to make sure there was no catch. Then after receiving the cards in the mail I called Citi for personal checks of $7000 for my wife and $8000 for me (leaving $500 on each so as to not extend to the limit). I just received the checks (5 days) and then sent them to Fidelity to be invested for 1 year in FGRXX. Current 7-day yield is 3.52%. I should be able to clear about $400-$500 depending on where rates go and what the monthly minimum is that I have to pay back to Citi.
All told, I think this is a great deal. If you can find the right circumstances, and you have the discipline to keep up with it and not spend the money, I highly recommend it.
Again, this is NOT financial planning. But, it is investing, albeit with a high level of risk in some ways.
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You didn't mention the fees you had to pay to get this deal.
Hi Puzo - thanks for the note. I did say "interest and fee free on balance transfers" which is to mean that I did not have to pay any fees at the time I signed up for this deal. Note that is *rare* from what I've seen on the 0% APR offers so definitely move with caution and confirm/re-confirm the terms before you get into this.
Also, I posted a followup here:
http://www.pfblog.com/coachcoin/4217_0_apr_followup.shtml
Coach,
I'm curious why you chose the mutual fund instead of a saving account like Emigrant or HSCBDirect which are both paying 4% right now.
15k @ 4% = $600 vs
15k @ 3.65 = $547.5?
Two reasons:
(1) I know my limits on time and one way I manage that is to have all my money in one place. So, I looked at the best options for Fidelity and chose that. I do not maintain multiple accounts across multiple institutions.
(2) I have to pay the minimum monthly payment out of the funds so I need them completely liquid. I have billpay hooked up to the money market at Fidelity.
How did you get them to send you personal checks? I thought they would only send checks to other credit card companies on your behalf (balance transfer)...
Your help is appreciated. I am looking to do the same thing you are describing.
Slim - I just told them I wanted to pay off high interest personal debt that was not on a credit card and asked for the checks. They suggested writing it to my name as a better option so I took it. Thanks for reading.
Coach,
So the whole plan works because you lied to the credit card company? I would suggest keeping the personal finance tips in the "ethical" category...
For what it's worth,
JC
JC - No, not at all. I met zero resistance to this suggestion. In fact, I didn't call to request a check in my name, but called to ask for the balance transfer checks (you get these all the time with every credit card statement). Rather than wait for these checks Citi happily suggested they would write me a check right to me, saving 10+ days.
Anyone at any time can use the checks you receive to write a check to yourself (indeed they suggest doing it to get you to pay the cash advance fee - bad idea). I simply bypassed that procedure by their own suggestion.
So, if I implied lying I that was not my intention. They would have sent the checks regardless as they always do and I can write them to whomever I want (I once paid rent with it).
Coach -
I hope your summary of this transaction works, as I just signed my wife and I up for the cards. Embarassingly, I messed up when doing my application, and entered my own income ($48k) instead of household income ($55k - my wife is a student). I was filling out my wife's application, I read the form correctly, and entered $55k. Citi told me that they'd mail me a credit decision within two weeks; however, my wife received an automatic acceptance with a credit line of $6000. Does this credit limit sound in line with the income figures you entered?
A brief snapshot of us financially:
I am a 25yr old CPA in a large Midwestern city, earning $48k. My wife (23 yrs old) is getting ready to start her last semester of pharmacy school and will have an income of ~ $95k in about 6 months. We have been married for one year, and have been living in a small condo for the same time, for which we owe $81,500 at 5.5% (7 yr ARM). We have no other debt, and have total retirement accounts of ~ $35k, and $20k of equity in the condo. However, we are very cash poor, as I put 10% into the 401(k) plan at work, and we are very committed to fully funding our Roth IRA again this year. Hence, the attempt to derive some free money for a year from Citi, which we will use to fund our remaining $5000 of Roth contributions for the year, and provide a much-needed cash cushion. Payback in Dec. '06 will not be a problem, as my wife will have been working for 6 mos at that time. Also, like you, I have absolutely no plan to apply for a mortgage.
FYI for your readers - according to the Citi website, the card offer is still for 0% (note-only on balance transfers, not purchases and cash advances). Also, Citi is still waiving the customary 3% balance transfer fee.
Sorry for the long post. Thanks for the credit card arbitrage - I have been wanting to do this for some time, but have not taken the time to research it.
I enjoy your blog - keep up the good work!
