balance transfers

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”

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.

If you are worried about what happens to your credit score when you apply for a new 0% APR card, then this tip is for you.

Here is what myFICO.com says about factors that do not affect your credit score:

Your own credit report requests, credit checks made by businesses to offer you goods or services, or inquiries made by businesses with whom you already have a credit account do not count toward your FICO score. Credit checks by prospective employers also do not count. These types of inquiries may appear on your credit report, but they are not included in your FICO score.

Read that carefully, it says “…inquiries made by businesses with whom you already have a credit account do not count toward your FICO score ”

For example, if you already have a Citi card and if you apply for another Citi card (or multiple cards) to avail a 0% APR offer, the new credit inquiries are not going to hurt your credit score. That’s good right? At least that is what I understand from the above information.

My good friend, Sun raised this issue on my previous post about credit scores and I thought about clarifying a few things here. Apparently, many people apply for a lot of credit cards in one fell swoop, banking on the fact that there is some mechanism in the FICO score that does not account for multiple inquiries done at once. That’s not entirely true and it’s important that you understand it. Here is what may be confusing people (source):

Looking for a mortgage or an auto loan may cause multiple lenders to request your credit report, even though youre only looking for one loan. To compensate for this, the score ignores all mortgage and auto inquiries made in the 30 days prior to scoring. So if you find a loan within 30 days, the inquiries won’t affect your score while you’re rate shopping. In addition, the score looks on your credit report for auto or mortgage inquiries older than 30 days. If it finds some, it counts all those inquiries that fall in a typical shopping period as just one inquiry when determining your score.

It’s important to note that this feature is only applicable to auto loans and mortgages. This is not applicable to credit cards. Here is what the website says about credit cards:

If you apply for several credit cards within a short period of time, multiple inquiries will appear on your report. Looking for new credit can equate with higher risk, but most credit scores are not affected by multiple inquiries from auto or mortgage lenders within a short period of time.

So, yes, an app-o-rama has the potential to hurt your credit score (unless you follow the tip that I mentioned at the start of this post). While it’s true that credit inquiries have the least effect on your credit score (as noted by another blogger here), it is still important to understand these things before you go about doing an app-o-rama for 0% APR credit card arbitrage. Inquiries hurt different people in different ways. Don’t do these things just because others are doing it that way.

It will be in your interest to read all the factors that appear here: myFICO Credit Inquiries, before you start getting into this 0% APR arbitrage game.

Ok so you have a 15 month 0% APR offer, how are you going to squeeze the best out of it? In one of my previous post the title says “Free Money..“. Where exactly is the free money involved? Am I talking about all the interest you will save by paying only the minimum required instead of clearing off everything on your card every month? Absolutely not! Here is how you go about it and how much you will earn from such an offer.

I will divide this into a two part explanation. Part 1 below will deal with how to use such an offer if you have balances on other cards (or carry debts). In a couple of days I will post Part 2 which will explain how to use it if you don’t have any balances on other cards (or you are essentially debt free).

How to do it if you have balances on other cards?
If you application is approved for a card that gives you a 0% balance transfer offer, avail the offer immediately. Sometimes this facility is offered during the application process and allows you to enter information for the cards towards which you want this balance transfer to be applied. Give priority to the cards that are charging you high APRs (giving priority to cards that carry lesser balances and/or lower APRs for “mental satisfaction” doesn’t make any financial sense to me). If you are not able to do this during the application process, call up the credit card company and do it over the phone. This will work for most credit card offers. At times, you can request a check for the balance transfer amount instead of directly transferring to other credit cards. This is convenient if you have debts that are not on credit cards.

How much will you save?
To simplify matters, let us assume you have a card that’s charging you a 10% APR and you have a balance of $5000 on that card. If you plan to pay off this balance uniformly over a period of 15 months, it works out to approximately $356 per month. By the time you finish paying this off, you will have paid a total of about $5340 ! that’s $340 more than what you owed. If you pay off this $5000 debt using 0% APR offer, you will save about $340 !
If you consider repaying $5000 over a 12 month period in a similar fashion, you will need to pay about $440 per month. That works out to $5280 by the time you pay it off. So applying your 0% balance transfer in this case will save you $280.

To estimate your total payments use this calculator from Bankrate.com

Very important things before you get into this:

-Never use such offers to borrow more than you can pay off within the offer time period. In the above example, get $5000 from the offer only if you can pay it off completely in the 15 months (or whatever you offer time span is). Always check the regular APR that is applicable after the offer time period. If this APR is very high and if you don’t pay off the entire amount immediately after the offer ends, your savings can disappear quickly.

-Make sure you are never late on the monthly payments. You miss one monthly payment and your 0% APR will vanish before you can blink. You need to get organized if you want to play this 0% APR balance transfer game.

-Always read the fine print. Check if there are fees involved with the balance transfer offer. Most offers will not impose fees on the first balance transfer. However, some cards don’t allow it for free and will charge a 3% fee . Usually, there is a maximum limit on this fee ($75 ~ $100). I will write more about this in time to come.

-Always check if you purchase APR is 0% for the offer period. If it is not 0%, then never use that card for regular purchases till you completely pay off all the balance you transferred. Payments are always applied to lower APR charges first. If purchase APR is 0%, then go ahead and use it for purchases but keep an eye on how close you are to the credit limit.

Another chance for earning free money with this credit card: Blue from American Express.
There is no balance transfer fee.
Here is what it says in the fine print:
“There is no balance transfer transaction fee associated with this offer. However, future balance transfers may incur a fee as disclosed at the time of the applicable offer or transaction”Other highlights are no annual fees and the 0% balance transfer is valid for 15 months (!) instead of the usual 12 months.

The APR is declared to be between 12.24% and 19.24%, depending on your credit history.

I recently applied for the Citi Professional Card with 10000 bonus reward points and a 12 month 0% balance transfer offer.

Here are some highlights of the entire experience:

- The application process was not at all an issue.
- Someone from Citi Professional Card called me up after 3-4 days to inform me that I have a high credit limit on another Citi card (Diamond Preferred Rewards Card). They suggested that I transfer the credit line from my old card to my new card. Btw, this is your ONLY chance to transfer credit limit to a Citi Professional Card from a “non-prefessional” card.
- After about a week and some contemplation, I decided that the credit line transfer wasn’t enough and asked them if I could transfer some more. Strangely, this time they say “We cannot transfer credit lines between a business card and a non-business card”. Reminding them that they did this when they called me the first time didn’t help.
-The 0% balance transfer took some time; it took about 10 business days before the check was home and another 7 days hold in my brick-and-mortar bank…and now the transfer to HSBC account will take it’s own sweet time :(. So it’s almost about a month before its starts gathering interest
-Got 10000 points with the first statement of my Citi Professional Card; this went very smoothly and I already see the reward points on Yodlee.

I should mention here that it is easier to track your reward points when you have them on Yodlee. I follow my Citi Thankyou Points and Upromise Cash Back on Yodlee.

Interesting article on MSN about how you can hurt your credit score. Here is the hot list of weird things that can do the damage (my comments are in italics):

1. Credit company not reporting your true credit limit (Capital One) (Not really weird)
2. Credit cards with no preset spending limits (Amex) (Not really weird)
3. Disappearing deliquencies or brankcruptcy (Weird)
4. Balance transfers (Not really weird)
5. Opening new credit card accounts (not a big deal), closing old ones (can be a big deal), but everyone knows this by now.
6. Settling old debts (Weird)
7. Tickets and fines (Expected, Not really weird)

The article does not mention this, but paying some bills late can also hurt credit scores. One example is T-mobile. I know for sure that paying your T-mobile bill late goes as a negative entry in your credit report. I don’t know how they do it, but they confirmed that they report late bill payments.