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 Jan 2018)
- You could get a 0% promotional annual interest rate (“AIR”)† for 12 months on balance transfers? [completed within 90 days of account opening], with a fee of 1% of the amount advanced (minimum fee of $7.50)
- 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?If you would like to read more articles like this, you can sign up for my free newsletter service below (we will not spam you).