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RSS0% Balance Transfers with Balance Transfer Fees
Well I bit again. I was going through my mail and noticed an offer for a 0% Balance Transfer from my existing Bank of America Credit Card (which I had only opened for a prior 0% balance transfer and haven't used since) till August 2007.
Reviewing the fine print the only catch was that balance transfer fees applied. 4% of the transfer amount up to $90. I have never done a balance transfer that had balance transfer fees, but this was the first time I received such a lucrative offer from an existing account. It was very tempting since it was already an open account - I didn't need to open a new account which significantly lessens the impact to the credit score.
First, I needed to make a few assumptions:
-Return in Emigrant Savings Account will stay at 5.05%APY (4.93% Interest Rate)
-Credit Card Minimum payment will = 1.5% of balance
-I am conservatively estimating I won't earn any interest in Jan or Aug (the months I receive and pay back the balance)
-I am assuming my marginal tax rate will be 33% (25% federal, 8% state) on interest received
-For estimate I am assuming I cannot deduct the balance transfer few as an investment expense
Then I figured out what my breakeven point was since I had to pay a balance transfer fee to take advantage of this 0% balance transfer loan. To do this I needed to factor in taxes since there is a balance transfer fee involved that I am not sure I can deduct as an investment expense. Assuming I can not, I would need to earn at least the fee + taxes on the interest just to break even.
[Interest Earned] * (1- [Marginal Tax Rate]) = [Balance Transfer Fee][X] *([1- [33%]) = [$90]
[X] * [67%] = [$90]
[$134.33]* [67%] = [$90]
So I need to earn at least $134.33 in interest on this balance transfer money just to break even after I pay taxes.
Next I tried to conservatively estimate how much interest I would earn:
| | Starting Balance | Paid Back | Interest @ 5.05% APY | Ending |
| Jan | $ 16,100.00 | $ - | $ - | $16,100.00 |
| Feb | $ 16,100.00 | $ 241.50 | $ 65.15 | $15,923.65 |
| Mar | $ 15,923.65 | $ 238.85 | $ 64.44 | $15,749.24 |
| Apr | $ 15,749.24 | $ 236.24 | $ 63.73 | $15,576.73 |
| May | $ 15,576.73 | $ 233.65 | $ 63.03 | $15,406.11 |
| Jun | $ 15,406.11 | $ 231.09 | $ 62.34 | $15,237.37 |
| Jul | $ 15,237.37 | $ 228.56 | $ 61.66 | $15,070.47 |
| Aug | $ 15,070.47 | $ 14,690.10 | $ - | $ 380.36 |
This estimate shows I could earn $380.36 in interest on this balance transfer money. Now I can factor in the balance transfer fee and estimated taxes to see what my after tax return would be.
Balance Transfer Return after Taxes:
[Net Interest] - [Taxes on Interest] - [Balance Transfer Fee] = [Return][$380.36] - [$125.52] - [$90.00] = [$164.84]
I should be able to net $164.84 after taxes (or $246.03 before taxes). Even possibly more since this is a conservative estimate. So I bit. I wrote a check to myself for $16,100 and immediately transferred it to my EmigrantDirect Saving Account.
by 2million on
01/11/07
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Comments (20)
You are really pushing to be like this guy I mentioned before aren't you? :P
Posted by frank | January 11, 2007 11:08 AM
You mean this guy. Slowly but surely. At this point its a no brainer to me if I can see a good return on my time and effort.
Posted by 2 million | January 11, 2007 11:14 AM
Have you considered putting the money into Treasury Bills on treasurydirect.gov instead of ED? The interest on T-Bills is not subject to state income tax, so your tax rate would be 25% instead of 33% on the interest earned.
Posted by Anonymous | January 11, 2007 11:34 AM
Yea, thanks for getting the right link. You think I'd be able to do it, but nooo, html is too hard for me :P
Posted by frank | January 11, 2007 11:39 AM
I have been reading about them as well. But since we are trying to buy a new (to me)house, I don't want to BT yet until we are done with a mortgage application. Great job!
Posted by Sue | January 11, 2007 11:51 AM
Shoot, I need to start paying more attn to the BofA mail I get, as I also have a BofA card and likely also got this offer....dang, 2m you have great ideas!!
Posted by finance girl | January 11, 2007 1:13 PM
I'm surprised how much effort BT-people employ for such a small amount of money. We're talking about $160 dollars, and the downside can be really painful. What happens if you forget a monthly payment? or you can't find a 0% BT after the term of another one is about to end. Any one want to comment about why this is a great idea?
Posted by thias | January 11, 2007 4:26 PM
mmm all that work and risk for $160?
Posted by garrett | January 11, 2007 6:14 PM
Just remember it can ding your credit.
Posted by Nagel | January 11, 2007 7:15 PM
Here is my take on why this is a good idea. This literaly took a total of 15 minutes of work on the front end (deposit heck, setup auto-payments) and will take maybe 15minutes at the backend so I am getting about $164 (after-tax) for about 30min of work. Easiest money I will ever make for the amount of effort. So far makes sense right?
What about missing payments? Well I set up auto payments with my checking account so I don't have to worry about missing a payment. I also setup a reminder to pay it off in Auguest in my personal finance software. While I will admit this doesn't guarentee I won't miss a payment, I haven't had any problems with auto payments and don't expect to.
Risk? I think its all about risk vs reward. I am getting a pretty good return on my time and I have a track record of being able to take balance transfers and not have any problems. I like my chances on this ;-).
Only $160? Add that to all the other balance transfers I have going and we are talking well over $1,000/yr in extra income. Thats not pocket change for me. If it is for you - congrats.
I am not saying there aren't more lucrative ways or better ways to make extra money, but this works for me. It may not be right for everyone. Just my opinion.
Posted by 2 million | January 11, 2007 10:22 PM
I started doing this back in October and we now have $10,000 in an Emigrant account that are earning $500 a year on. We have always put everything on the credit cards and then paid them off every month. So we are doing pretty much the same thing now, except putting it into a savings account. Definitely worth the time and effort. It is not risky, as the money in the account and not spent somewhere. I think it is very easy money and we add to it each month.
The ones that I have for a year I am putting in a CD from Emigrant and earning a bit higher APY. Every little bit helps ;)
Posted by Sharon | January 12, 2007 1:44 PM
My wife and I have each received Discover lifetime 0% transfer offers recently. There's a couple catches: 1) after a year, you have to make one purchase a month (of any size) and 2) there's a transfer fee of $39. Overall pretty decent, but I'm trying to clean up credit from past 0% arbitrages.
Posted by CPA1298 | January 12, 2007 8:47 PM
Why do a transfer?
Can you not just charge all purchases under the sun via credit card? The wedding an honeymoon will burn through a lot of cash, and doing it this way you get a 4% discount. If you send $1500 a month that can be charged and have a couple of large expenditures you'll be to $12k in 6 months, and that will add another $450 to your savings.
Posted by Kirk | January 15, 2007 10:31 AM
True you can do the same thing with purchases and I might be able to get away with it this year with the wedding expenses, but in general I don't even come close to spending this kind of money on CC purchases.
For purchases I usually just use the CC with the highest reward for that transaction type.
Posted by 2 million | January 15, 2007 11:32 AM
Anyone who doesn't use 0% balance transfers is just giving away free money.
The Citi Upromise card has 0% for 12 months and no BT fees. Also the 0% doesn't start until you do your first transfer which must be within the first twelve months.
The actual link is here: http://citi.bridgetrack.com/usc/05/upromise/50_50Test/flash/flash.htm?passBT=1&app=UNSOL&sc=4TUZS105&m=7CJ66O5EI0W&langId=EN&siteId=CB&B=M&AID=10365454&PID=344661&SID=668%25255F19019310&BT_TX=1&ProspectID=496CA2962BD84777BAC6D83794696046
Posted by Ray | January 17, 2007 7:54 AM
CPA1298, can you provide me a url link to that Discover card offer? It's provided in the mailer. Drats!! They offerred me a similar thing but definitely not as good because after 6 months (instead of 12) I have to make 2 (instead of 1) purchases plus they charged me $75 (instead of $39) for the BT fee. That sucks! I've done it already but I may give them a hard time for their rep not offering my the better deal instead. I even asked the rep that perhaps he can waive the BT fee but he wouldn't budge, not even a discount.
Posted by Joe | January 29, 2007 7:03 PM
The first few comments are overlapping the
ads on your blog....very bad blog page design....
Posted by Harm | February 21, 2007 2:22 PM
Be careful when you get a cash advance at the same time as you have another balance on the same account. I took a 1.9% offer. Because I had a $500 balance on regular purchases, I have to pay off the cash advance of 1.9% before I can pay off the $500 balance for which I have to pay 19%. If the cash balance was encashed in a different billing period, everything would have been fine according to the customer rep.
Posted by Larry | March 27, 2007 8:09 AM
Well, what happened? Your year was up and your taxes were paid (I hope). What was your actual ROI. Did you make you easily afford the minimum payments (~$200 mon?) Did you make payments form the same account earning interest, thereby reducing the compounding interest?
Posted by JustAWebGuy | May 7, 2008 3:21 PM
Good question -- ill add it to my list to see if I can find the numbers in my archives and publish the end result.
Posted by 2million | May 7, 2008 8:03 PM