I mentioned in an earlier post that, about six months ago, I involved myself in some 0% APR credit card arbitrage. Here, I will document a few things about my current credit score (as compared to my score before the arbitrage), that may interest some of you. If you don’t know what I am talking about, and/or if you haven’t heard about “0% APR credit card arbitrage” or “0% APR balance transfers” before, you must read this primer: How to Make Money from 0% APR Balance Transfers @ My Money Blog.
Before you start drawing conclusions from the numbers and charts below, here are some background facts about my credit that warrant consideration:
- Ratio of credit card balances to available credit limit (credit utilization) before arbitrage: ~ 2%
- Credit utilization after arbitrage: 23%
- Length of my credit history: 5 years
- Cards used in 0% APR arbitrage: 2
- Number of open credit cards on record: 9 (click here to read about how I manage them)
- Credit score before 0% APR arbitrage: 771 (click here to read more about this). This score was based on 9 open credit card accounts, but the 0% APR balance was not yet reflected in the score…so essentially, it gives a good reference for comparison.
Current credit score
This score may not be reflecting the worst situation after the arbitrage. Right after I availed the 0% APR offers, I was using about 26% of the available credit. The credit score must have been lower at that time. Since then, I have made a few minimum payments towards both the cards, which must have improved my score a bit. Based on the situation, it is fair to say that almost the entire drop in the score can be attributed to the increase in credit utilization (from 2% to 23%). Anyways, 737 is not too bad.
What does this credit score mean to me?
Here is a table that myFICO drew for me.
Obviously, lower FICO scores will mean higher interest rates (in most cases). But, at present, this is OK for me because I am not looking at any big loans in the near future. However, for someone who is looking for a 30 year mortgage, this drop in the credit score may make a huge difference. For example, if you get a 30 year, $200,000 mortgage at 5.99% instead of 5.77% , you will end up paying about $10,000 more (over a period of 30 years) than what you would have paid if your interest rate was 5.77%. So be careful about the timing of your arbitrage if you are looking to borrow large amounts soon. As a rule of thumb, I would suggest a period of at least 2 years of “no credit card balances” before you go in for borrowing something big.
What may have affected my score?
The score report mentions these as negative factors towards my credit score.
The proportion of balances to credit limits (high credit) on your revolving accounts is 23%. The average proportion of balances to credit limits (high credit) on revolving/charge accounts carried by U.S. consumers is around 36%.
According to your credit profile, you have 4 accounts where your balances last reported are greater than $0. On average, U.S consumers carry balances on approximately 4 of their credit accounts at a given time.
Of the 4 accounts, 2 were carrying the 0% APR balances and the other 2 carried a purchase balance at the instant of time that my credit report was pulled up for score calculation. Eventually, as I keep paying off the borrowed *free money*, both these factors will change for good and improve my score.
What does this score mean to lenders?
For lenders, here is how the FICO score relates to the risk of lending money to me.
Seems like I am not that bad after all, although I have jumped from a 2% risk level to a 5% risk level in the process of utilizing the 0% APR balance transfer offers.
The mathematically curious/observant/astute will appreciate the fact that this chart almost follows a sigmoid function (I used this function earlier in this post). For others, it will be sufficient to say that if your credit score is very high or very low, a change in your credit score will have smaller effects on how lenders perceive the risks associated with your credit. When I say “smaller”, I am comparing it with a situation in which you credit score is *medium* (say between 500 and 700). People with credit scores around this range should be extremely cautious of things (including 0% APR credit card arbitrages) that may damage their scores. For example, I might be digging a ditch for myself if I indulge in another big 0% APR arbitrage transaction at this point of time - when my score is 737 (most likely that will throw me in the 14% risk group)
So that’s about it. In conclusion, I am pretty much OK with the changes that the 0% APR arbitrage has caused to my credit (as compared to the free money that I am earning with the borrowed amounts). This sort of encourages me to do something similar this year too. Although, I would wait till my score bumps up a little bit (comes near 770 again).
Before I conclude this post, I would like to offer a word of caution here if you try to compare your situation with some of the data presented in this post. The numbers above give a fair idea of what’s happening to one’s credit situation, and yet they are just a little more than *handwaving*. Mortgage rates (or any other loan rates) depend on a lot of other factors, in addition to credit scores, so keep that in your mind before jumping to conclusions.
Feel free to drop a line or two about any interesting observations or perceptions (either from the above writeup or from anywhere else) that you may have about 0% APR arbitrage issues.