Got a letter yesterday from Citibank in the mail with the subject “Notice of Change in Terms and Right to Opt Out”. The letter informs that the maximum transaction fee limit for balance transfers on Citibank credit cards will be removed effective April 3rd.
Earlier, the upper limit on transaction fees was $75 (I think…I forget whether it was $75 or $100).
Balance transfer transaction fees (usually 3% of the amount transferred) are never good deals, so generally people opt for $0 fee offers. However, at times, because of the upper limit on the fees, certain with-fee balance transfers were also attractive for large amounts. For example, before this change, a person looking to transfer a $10,000 balance from a high interest credit card to a low interest credit card would have paid only $75 as fees because of the upper limit. But now, he/she will have to pay 3% of the entire amount transferred, which will be $ 300 in this case. That’s not very happy.
For people who indulge in 0% APR credit card arbitrage, this is going to be a bit discouraging. Consider the usual scenario of availing a 0% APR balance transfer offer, and then putting the money in an online savings account at about 5% rate of return. After this change, arbitrage enthusiasts stand to gain only 2% (only 0.75% if taxes are taken into account!!…assuming a 25% tax bracket) of the transfer amount in a year, if there is a 3% fee with no upper limit. A person transferring $10,000 will gain only $200 in a year. This will sort of make small balance transfers not worth the trouble. Start looking for fee-free balance transfer offers. 
I have a feeling that even the fee-free offers are on their way out if this thing sticks around.
Other credit card companies won’t be far behind…(probably some of them may have already implemented a similar change).
Btw, I don’t understand the “Right to Opt Out” terminology. There is no *opting* out…you either accept the change or they will close your account. Here is what the letter says about opting out of this change:
“If you opt out of this change you may use your credit card(s) under the current terms until the end of your current membership year or the expiration date on your card(s), whichever is later. At that time your account will be closed and your must repay the balance under the current terms”
{ 3 trackbacks }
{ 9 comments… read them below or add one }
“After this change, arbitrage enthusiasts stand to gain only 2% of the transfer amount in a year, if there is a 3% fee with no upper limit.”
You forgot about taxes. 5% is taxable income. 3% fee is after tax expense. After tax, say 25% bracket, the arbitrage earns nearly nothing.
TFB: Oh yeah…thanks for reminding about the taxes.
Let’s put some numbers right here.
$10,000 invested at 5% APY gives $500 in interest. Of which 25% will go towards taxes (considering a 25% tax bracket). That leaves us with $375. The transaction fee on $10,000 is $300.
So total profit will be a mere $75 on a $10,000 arbitrage.
I got the same letter yesterday as well. However, I don’t really understand what the mean “repay the balance.” Do I have to pay the fee later if I choose to opt out now? I also don’t like they close my account without my request.
Sun: What they mean is, if you decide to “opt out” and if you card has a balance on it…you need to give it all back and then they will close the card.
This change only applies to balance transfers in future (after April 3rd). So if you already have a Citibank card and a balance on it, that’s not going to be affected by this change of terms.
So if you already have made use of a 0% APR offer in the past on a Citicard….it does not make sense to opt out…just accept the change of terms and make sure that you don’t do any balance transfers in future on that card.
Are there people who do make money on “Interest Rate Arbitrage” via consumer credit cards? Wife and I do this sometimes for cards that let us hold the low interest balance for as long as possible but once I got cocky and tried it on a time-limited offer but just about got blown out of the water. Returns in practice, I think, are way less than the theoretical. Add the risk and they can keep their offers most of the time as far as I’m concerned.
Customers Revenge: I read your post and yeah…the practical returns are less than theoretical ones…but with the right amounts and the right length of time, those practical returns can be significant (when there are no transfer fees involved). The risk factor does exist…but it’s free money, so some people are ok with that. If you religiously track your deadlines and keep yourself organized, you could minimize a lot of risk.
To specifically answer your question: “Are there people who do make money on “Interest Rate Arbitrage†via consumer credit cards? “. YES, people do make money on interest rate arbitrage. Although, it’s not everyone’s cup of tea.
I got the letter, too. Looks like the jig is up on credit card arb.
I’m going to call and tell them I’m canceling my card because of this and see if I can get some Thankyou points from them.
Yes, that seems like a lot of trouble and tracking for the return. I don’t get into stuff like this because I’m terrible at record tracking and will probably lose out if I attempted it. That’s the reason why I only own 2 credit cards.
KMC: yep…our only hope is no fee transfer offers…if at all those things still survive.
SVB: Without the fee it was worth all the trouble. But with the fee it looks more like a pain.
Btw, only 2 cards? Man..that must be peaceful.
Leave a Comment