Credit Card Arbitrage II – An Analysis
To continue with yesterdays post on How Credit Card Arbitrage Works, I will now dive into the offers available to Canadians, the returns, who exactly this strategy is best for, and my conclusions.
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 (as of March 2012)
- 0% interest rate for 10 months.
- Apply for the MBNA Canada Platinum Plus Card.
- The biggest stipulation with the MBNA offer is that they charge a one time 1% fee of your total amount borrowed along with a minimum monthly payment of $15/month which reduces the balance owed. Make sure to read the fine print.
- So, if you get a credit limit of $10,000 and borrow the max amount, then MBNA will charge you $100 (1%) + $15 in the first month, and $15/month after that.
- 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?
- The 1% transfer fee (MBNA fee) may be tax deductible due to using the proceeds for “investment” purposes (for taxable accounts only)
- 40% marginal tax rate (not an issue if you use a TFSA)
- Outlook Financial or Acheiva TFSA (August 2011, 2% savings account).
- Credit limit: $20,000
Results in Taxable Account:
- 2% Savings Account
- $20,000 x 1% (transfer fee) = $200 (tax deductible fee), after tax fee = $120
- $20,000 x 2% (interest rate return) = $400/year, net after tax = $240
- Total return on $20,000 = $240-$120 = $120 (0.6% annual return)
Results in TFSA:
- 2% Savings Account
- $20,000 x 1% (transfer fee) = $200
- $20,000 x 2% (interest rate return) = $400/year, net after tax = $400
- Total return on $20,000 = $400-$200 = $200 (1.0% annual return)
Who should do this?
- 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.
- People who have the TFSA contribution room, and risk averse. This strategy is pretty close to “free money”.
- Because of the credit score consequences of this arbitrage and low returns in low interest rate environments, I am hesitant in using this strategy.
- 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, had the TFSA room, and we were in a higher interest rate environment.
What are your thoughts on credit card arbitrage?