Credit Card Arbitrage II – An Analysis
To continue with yesterdays post Credit Card Arbitrage I, I will now dive into the offers available to Canadians, the returns, who exactly this strategy is best for, and my conclusions.
Offers available (As of Aug 28, 2007)
In Canada, we are very limited in 0% balance transfer offers. The two offers that I know about right now is from MBNA and Citigroup.
MBNA
- 0% interest rate for 15 months and a max credit limit of $100,000.
- If you are interested in applying, call MBNA and refer to bonus code: BODX for the MBNA Canada Platinum Plus Card.
- The biggest stipulation with the MBNA offer is that they charge a 1% fee of your total amount borrowed along with a minimum payment of $10/month.
- So, if you get a credit limit of $10,000 and borrow the max amount, then MBNA will charge you $100 (1%) + $10 in the first month, and $10/month after that. Of course, the $10/month goes against your balance.
- For more info about this offer, check out this thread on RedFlagDeals.
Citigroup
- 0% interest rate until May 2008 (almost 9 months) or 12 months if you’re a Rogers customer.
- 1.5% fee for balance transfer cheques (kills the deal).
- For more info, check out this thread on RedFlagDeals.
After taxes and fees, what are the returns for the MBNA offer?
Assumptions:
- The 1% transfer fee (MBNA fee) is tax deductible due to using the proceeds for “investment” purposes
- 40% marginal tax rate
- PCF 4% savings account or 4.5% GIC.
- Credit limit: $10,000
Results:
- 4% Savings Account
- $10,000 x 1% (transfer fee) = $100 (tax deductible fee), after tax fee = $60
- $10,000 x 4% (interest rate return) = $400/year, net after tax = $240
- Total return on $10,000 = $240-$60 = $180 (1.8% return) /year
- Or With a 4.5% GIC:
- $10,000 x 4.5% = $450/year, net after tax = $270/year
- Return = $270-60 = $210 (2.1% return)/year
Who should do this?
- Obviously, this will work well for people with lower marginal tax rates. However, usually lower marginal rates (unless you own a business), means lower income which usually results in a lower credit limit. If the credit limit is too low, it may not be worth your time.
- People who don’t need their credit scores (ie. get a loan) while performing this strategy. This strategy will most likely temporarily reduce your beacon score.
Conclusion(s):
- Because of the credit score consequences of this arbitrage and low returns, I am hesitant in using this strategy especially since I need to get a new mortgage soon.
- On top of that, even though the risk is low, the tax hit on the returns almost make it not worth the trouble.
- The only way that I would consider doing this sort of arbitrage is if I could come up with a credit limit of at least $50,000. If I could get the desired credit limit, then I would put the entire amount into a PCF GIC paying 4.5% for the year, and the remaining 3 months in a 4% account.
- This would result in an approximate after tax profit of: $50k x 2.1% = $1050 + $300 (3 months in 4% account after tax) = $1350.
What are your thoughts on credit card arbitrage?
28 Comments, Comment or Ping
1. The Financial Blogger
Well, we are not left with too many options! Sometimes it sucks to be Canadian ;-)
Seriously, it sounds like a lot of paperwork (cc application, savings account opening, etc) for a small $200! I can’t picture many people being able to get a 50K CC to proceed with this method. However, if one can qualify for it, then it may be worth it.
I would be curious to hear from people who already tried it. Maybe they have other tricks as well! On the other side, $200, is $200 !
Sep 4th, 2007 @ 8:46 am
2. tom venner
I work my FA business through a GIC brokerage, rates of around 5% are currently available for terms of 1yr (CDIC insured!). If you have a family net worth of say 500-750k,no debt, how much of a limit do you think would be available? I have all investment income coming through my wife for tax purposes(she inherited)and she’s not working (lowest tax bracket)sounds tempting.
Sep 4th, 2007 @ 10:20 am
3. FrugalTrader
Tom, you would have to contact the credit card provider to see what kind of limit they would give. I believe that they give out credit based on the income of the individual.
But even if you don’t get an extremely high limit, a low tax rate, along with a decent GIC return makes the arbitrage appealing. Perhaps the working spouse can apply for the card, with the spouse as a “secondary holder”. Get the secondary holder to invest the money.
Sep 4th, 2007 @ 10:34 am
5. Bean Counter
My experience with MBNA and Citigroup for credit limit:
MBNA – their credit granting policy is pretty loose. You can applied two cards and reallocate credit to take advantage on the 0%. If you’re not satifised with the credit limit, you can call and request for credit limit increase. If you are looking for $50k CC, this may be the one easier to get.
Citigroup – 10% of your gross income. When I applied, Citigroup just called my work number and ask me to “confirm” my salary. But I’ve heard that citigroup requested paystub for proof of income in other cases. Btw, I got into this deal early and there was no transfer fee at that time.
FB – I agree that sometimes it sucks to be Canadian :>
Sep 4th, 2007 @ 12:27 pm
6. Nars
Regarding the 1% transfer fee (MBNA), you can always negotiate (I have done it couple of times, either reduce 1% on the APR or waive the transfer fee). Tell the agent, you are transferring over 10K, which is quite a large amount. Insist that they talk to the supervisor. If they don’t agree, tell them you will take the business to some other CC. You can try the same trick with other agents by calling at different times.
Sep 4th, 2007 @ 12:35 pm
7. Bean Counter
I guess it wouldn’t hurt to ask. But I am not sure if MBNA would wavie the 1% if the deal is for 0% balance transfer. If this is a regular transfer subjected to APR, I won’t be surprise too 1% wavied without talking to the supervisor.
Sep 4th, 2007 @ 1:05 pm
8. the Wealthy Canadian
I’ve heard of people performing a derivation of this by using two credit cards.
Make the “purchase” on card A. When the payment comes due in a month, pay it off using card B. When card B payment is due, pay it off on card A. wash, rinse, repeat.
I’ve never done it. But I keep receiving cheques in the mail promising that there will be no interest for a month, etc. So conceivably you would never owe any interest, you would not take a credit hit (you’re always paying off the balance), and you get the points if you have that type of credit card.
Again, I have not done this. All you’d need to do is be late on single payment and suddenly you’d owe a full months interest on entire balance! It would likely take five months to recover from that mistake (assuming 18% cc rate vs 4% savings rate).
Sep 4th, 2007 @ 2:33 pm
9. The Financial Blogger
WC,
I did it a few of years ago (about 5) and it works. However, CC companies always find a way to charge you a little something. Either fees to use their cheques or interest on immediate withdrawal.
Personally, I was withdrawing money from a ATM machine through my CC to pay off others. The only flaw is that I was charged interest (about 4%) on the amount withdrew right away.
You better make sure you validate with you CC company before you do such things ;-)
Also, keep in mind that banks don’t like to see that kind of techniques either ;-)
Sep 4th, 2007 @ 2:57 pm
10. telly
Oddly enough, we just got an offer from Citi in the mail today. It’s for 0% on balance transfers until August 2008. It also says that the promotional transfer cheque fee is waived for this offer.
I’m still worried that writing a cheque to myself would result in a cash advance…
Sep 4th, 2007 @ 3:40 pm
11. telly
BTW, ther citi card offer is not just for Rogers customers (we’re not) and the offer code is: C7Y.
Is it possible to find out what your credit limit would be without applying for the card?
Sep 4th, 2007 @ 4:39 pm
12. FrugalTrader
Telly, I think your best bet would be to call a rep and see what they say. But Bean Counter mentioned above that Citibank gives 10% of gross income. Not enough in my opinion.
Sep 4th, 2007 @ 6:20 pm
13. nobleea
Wealthy Canadian/Financial Blogger;
Of course that scheme works. The credit card companies make money each time you make a cash advance. Unless you have a ridiculously low APR on cash advances, then you’re essentially getting a line of credit at the cash advance APR.
FT:
Another way to use the credit card arbitrage would be to put the money against a balance you have on a Line of Credit. This might be 6% interest, plus you don’t have to pay taxes on it, since you’re saving interest rather than earning it. Of course some might not enjoy this as there’s nothing to show for it at the end (ie, no interest earned).
Sep 4th, 2007 @ 8:59 pm
14. Cannon_fodder
Well, it seems that if you have a mortgage with prepayment privileges AND it is coming up for renewal within the timeframe of this offer, it would be worth putting the money down on your mortgage.
For example, if you have a 5% $200k mortgage at 25 year amortization with $1,163 monthly payments your balance at the end of 1 year would be $195,845. If, however, you got $50k in ‘free’ money and put it down on the mortgage, then a year later your mortgage would be $143,312. You then renew your mortgage and take the $50k out to pay the CC balance and your mortgage is $193,312. You’ve just saved $2,500 tax free.
Sep 5th, 2007 @ 8:28 am
15. K.K.
Another good way to make extra spending money is using referrals with banks. I came up with several ways to maximize income with a total of sign-up Bonuses for and instant $83, and max $843. This includes ING $13 (max $260) (sorry, no ref codes in comments), and ICICI $20 (max $500). So far I have made about $450 extra spending money in only approx 2 months. And there is no credit impact because a soft credit check is only done unlike a hard credit check when applying for credit. You can check the link for a full details.
http://www.forum.smartcanucks.ca/showthread.php?t=12204&highlight=ing+direct
Sep 6th, 2007 @ 1:41 am
16. Rick
I just tried MBNA for their 0% credit card but they just offered me 1.9% and the credit limit was low. They did offer me 0% on “purchases only”. Perhaps they are catching on…
Oct 15th, 2007 @ 1:00 am
17. JC
Has anyone tried putting the money somewhere besides a savings account, i.e. a mutual fund? I know this is riskier, but would be curious to hear anyone with experience doing this.
Oct 21st, 2007 @ 8:56 am
18. The Financial Blogger
I don’t know if it would a good idea. The 0% rate is usually good for period for 6 to 12 months. If you like gambling, this is a game you can play but you can not calling this investing!
You are better off with an investment loan at prime that will last forever as long as you make your interest payment!
Oct 21st, 2007 @ 9:16 am
19. nobleea
I have applied for the MBNA 0% transfers card, we’ll see what they give me for limit. I was hoping for over 20K.
I plan on putting the money against a LOC that I use for investing (6.25%). The effective interest rate after tax credits is closer to 4%.
Compare that to putting the money in a high yield savings account (say 4.5%) that would be taxed. The effective interest rate after taxes, including the 1% fee used as a tax credit would be around 3.4%. If you can only get 4-4.25% high yield savings account, then the return is obviously less.
They are both guaranteed money. A rise in interest rates would be immediately reflected in the LOC savings, but could take a while to filter through for the high yield account. Conversely, for a drop in interest rates, both the LOC rate and the high yield rate would likely drop simultaneously.
Oct 22nd, 2007 @ 1:43 pm
20. crystal evans
need a $10,000.00 credit card right away.
Feb 7th, 2008 @ 7:08 pm
21. TDang
We used balance transfer cheques to pay down our HELOC and withdraw from HELOC to pay it back usually 1 month before term expire. So far we’ve tried RBC, MBNA, Citi and President Choice. The lowest rate we got is .9% with no balance transfer fee @ RBC with low monthly payment for 20K loan you’re looking at $12/mth payment .The highest is MBNA 0% but 1% balance transfer fee.
Nov 13th, 2008 @ 4:25 pm
22. Alf
Hello, not sure if anyone will reply, but I am also a Canadian and I do not have any outstanding debt (no mortgage, no car loans, no CC debt).
So, I would like a piece of this $200, but was wondering what my options are in Canada. The MBNA mentioned in this blog post is out of date.
Also, I cannot do a “balance transfer”, as I have no debt, so I will probably need to write a cheque…(right?)…however, with my past experience with credit cards, none so far have offered me a chequebook, so if this step could be explained in further detail, that would be great.
Nov 17th, 2008 @ 8:51 pm
23. Jeff
Sounds like Canadians have very few options for this compared to Americans..
As a result, I do have one question.
If an MBNA card is used for this purpose, can you cancel the card after completing the arbitrage, and then immediately re-apply for another 15 month 0% APR card?
Or will you almost certainly be turned down because its clear you’re only using the card while there are no interest fees?
Nov 20th, 2008 @ 8:23 pm
24. Arid
Have recently heard about the Tax-free saving accounts from PC as well as from other institutions. I guess the equations will change once it comes into effect Jan. 1.
Nov 23rd, 2008 @ 8:12 pm
25. FrugalTrader
Hi Arid,
Good call, that is exactly what i wrote about recently in my TFSA strategies:
http://www.milliondollarjourney.com/top-4-tax-free-savings-account-strategies.htm
Nov 23rd, 2008 @ 10:29 pm
26. L505
Note to FrugalTrader: above post is link spam from mr Visa Black Card if you look at his URL. His only intention was to spam his link in his name.
“however, with my past experience with credit cards, none so far have offered me a chequebook, so if this step could be explained in further detail, that would be great.”
Well the credit card cheques can be ordered by calling your company, they will send you personalized cheques usually. Depends which card company you have but most of them offer the cheques as they are a money maker for the card companies (except for the shrewd and cunning investors that use the cheques cleverly).
Feb 13th, 2009 @ 1:05 am
27. FrugalTrader
Thanks for the heads up L505, I will fix it.
Feb 13th, 2009 @ 9:38 am
28. M7L
First of all, good blog… it’s my first time here. One thing that should be noted here is that those checks that credit card companies periodically send with your statement are cash advance checks. You can write the check to your name and deposit into your account. However, cash advance rate applies, which means that you are usually charged interest from the moment you withdraw the funds. Even with promotional rates, they will have perhaps 0% on balance transfers, but usually at least 1.9% or higher on cash advances. So that’s something you should be careful about. It is good to use for balance transfers from higher rate debt. That is also arbitrage in the form of paying less interest, thus having more to pay off your debt quicker.
Feb 25th, 2009 @ 3:23 am
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