0% APR Followup #3
Reader "CPA1298" commented on my 0% exploits here. I'm going to take this opportunity to dissect his points and offer my comments.
CPA1298 starts, "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?"
Our household income is around $60K so it looks to be in line with what you got. We qualified for $7000 and $8000 which was interesting because my wife doesn't work right now. I was surprised how loose the requirements were.
Personal background info: "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... I put 10% into the 401(k) plan at work, and we are very committed to fully funding our Roth IRA again this year."
Let's say "a large Midwestern city" is St. Louis. Using a cost of living calculator I converted that to a New York salary in order to compare in terms I know. The conversion means about $53K in NYC. The future salary for your wife's pharmacist job is going to make a huge difference in income so you have some room to move. I used salary.com to validate the assumption of income and it looks spot on. My only caution would be depending on that income to happen right when you think it will. My wife was supposed to be done with nurse practitioner school this past December. We ended up having some problems and had to delay for a year which has us relatively strapped. But, assuming the risk is low there it's okay. With 6 years left on the ARM there is reasonable interest rate protection before you have to contend with a higher mortgage payment. My guess is you would move before that time since this sounds like a starter house. Retirement savings are very good considering your young age. Keep that up!
Here's where things start to break down a bit for my risk tolerance: ...we are very cash poor...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.
Now, this is just me talking, but if I'm not going to throw the flag here I might have to go to the booth for instant replay. The notion of using this money for the Roth contribution scares me a bit. Reason? You can't get it back without serious penalties in the event of an emergency. You are therefore betting $10,000 on your wife's being able to work in 6 months. Sure, that might be a safe bet, but it's a bet nonetheless and bet's, by nature, are risky. You mention you have no cash cushion and that you are cash poor. In that case I would have recommended you stash the cash locally in a short term savings vehicle as I did. I am very worried about the prospect of taking $10,000 $8000 (assuming full Roth contribution for 2 in 2006, [update: without the catchup provision for older savers that I originally posted]) of credit card debt with no cushion. Better idea would have been to use this as the cushion you need and wait until that income is rolling, then make the Roth contribution and pay back the Citi debt. "Payback will not be a problem" is the kind of statement that often gets filed under "famous last words". If for any reason you failed to pay back that loan the entire balance would move from 0% to 13.24% immediately. That's no longer a picnic and it's exactly what Citi hopes you would do.
Bottom line, this is risky and I wouldn't recommend it. Will it work? Probably. Chances are good but you took on a hefty deal of risk. There is a contrast to what I did in having the money available. I don't have to earn it back with salary to pay it back. Just be careful with this!
Overall, seems like you are under control. Your savings rate is excellent. If you can keep that up you'll be in great shape. In the future I recommend being more conservative with leverage though. Funding the Roth in a down income year isn't worth the risk you took on.
Anyone else having comments?
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Coach -
Thanks so much for your analysis. However, I left out a key point, which will probably alter your conclusion.
We are going to move from our 'large midwestern city' (which you correctly guessed to be St. Louis) to a 'small midwestern city' in May 2006. This will allow us to sell our condo, and free up ~ $25k of equity. We will not be buying a new home, but instead will be renting a comfortable two-bedroom apartment for ~ $450/month (while making $130k per year - I'm excited about this). The liquidity from the house sale, combined with my wife's near-certain employment in June, will allow us to pay off the credit card balance in December, if I am unable to roll it over onto a new 0% offer.
I received a total of $14,000 from Citi (I left $1,000 of breathing room on each card, so the credit bureau's wouldn't report that I was maxing out my cards). The $14,000 is currently sitting in Emigrant Direct, earning 4%. Once my first Citi statement arrives, and I can determine finally that the 0% is legit, I am going to finish funding our 2005 and 2006 Roth. By the way - isn't the 2006 limit $4000 per person, for a total of $8,000?
I have also applied for a US Bank Visa, which is giving me $12,000 for 0% purchases and 0% balance transfers, with no fee. They are in the process of mailing me 'convenience checks'. Allegedly, if I write a 'convenience check' for more than $500, it is treated as a purchase (at 0%). However, when the checks arrive, I will call US Bank again to verify this almost too-go-to-be-true situation. The $11,000 I will pull from US Bank will also go to the Emigrant account, at 4%. Not big money, but better than a poke in the eye.
I apologize again for the long post, and thanks again for the detailed analysis of the situation. Any further comments or ideas?
CPA1298 - you are absolutely right about the Roth, the $5000 is including the catch up provision for older savers. Since I've been working with one I incorrectly noted that amount. It's actually $4000 for us youngsters.
Sounds like you implicitly reached the same conclusions I did so well done. With the additional details I agree you are on target. You're in a great position. Keep up this performance and you'll be doing very well.
One note - make sure you sell after you live in your home for more than 2 years so you can get the tax-free gain. However, there are exceptions as you likely know. I believe (without checking) that you can move for a job and still get the gains tax-free.
Again, best of luck to you! Thanks for reading.
Thanks for the followup. I plan to realize a capital gain of approximately $5,000 on the house, after the costs of selling, etc. I will have lived in the condo for approx. 20 mos. at the date of sale, so my planned tax treatment is to prorate the exclusion (20/24) x $5,000 gain = $4,166 non-taxable. I can qualify to do this since I am making a work related move.
