Credit Card Balance Transfer Arbitrage Success Factors
What are the factors that really affect the profitability of doing a credit card balance transfer arbitrage? Well, it turns out that your taxes, balance transfer fees and also the length of the introductory period all have a role to play. There is not much you can do about your tax rate and the length of the introductory period depends on the card you apply and to a certain extent your credit score. So the balance transfer fee is something that you have to be aware of and is a major factor in the choice of credit cards you apply for.
Just not so long ago (beginning of the year), many credit cards that offer 0% APR teaser deals and they waived the balance transfer fee for the introductory offer. However, I think issuers realize that they are giving away too much of a good deal and have taken very subtle steps to recoup some profitability.
Firstly, Bank of America removed the cap of the transfer fee applied to their balance transfer. They had many cards offering 0% balance transfer deals for 12 months…but the absence of a cap on balance transfer fees mean that those with a huge balance will end up paying the full 3%. Citibank has also removed the cap on balance transfer fees on most of their consumer cards.
But how does balance transfer fee affect the 0% arbitrage game? Well, the theory is to “borrow” at 0% for 12 months and invest it in a high yield savings account like the HSBC Online account. You have to pay off about 2% or 4% (minimum payment) on the balance transfer every month. And you will earn your interest on your banking account. The cash flow may not match, but you should come out ahead. But the higher your balance transfer fees, the less profitable the arbitrage will be. Here are some examples to illustrate.
Examples
Cards with no cap of balance transfer fees
Let’ say you decided to do a $10,000 balance transfer. If you did not read the fine prints and do a transfer with a card that does not cap the balance transfer fee, this is how it will work out.
Do a balance transfer of $10,000.
Fees : $300
Profit if you deposit with HSBC Bank : $505 (at present rate)
After tax profit (assuming 25% tax rate) : $378.75
Net profit : $78.75
Well, that’s great you may say. But would you really go through that hassle for $78?
Cards with 12 month 0% introductory period – with balance transfer fees but with a cap of $75
What if you do a balance transfer with a normal credit card that imposes a balance transfer fee and caps it at the usual $75? Let’s use the hypothetical card as an example…..
Do a balance transfer of $10,000.
Fees : $75
Profit if you deposit with HSBC Bank : $505 (at present rate)
After tax profit (assuming 25% tax rate) : $378.75
Net profit : $303.75
hmmm…much better
Cards with no balance transfer fee
Let’s now do an example with a card that has no balance transfer fee.
Do a balance transfer of $10,000.
Fees : $0.00
Profit if you deposit with HSBC Bank : $505 (at present rate)
After tax profit (assuming 25% tax rate) : $378.75
Net profit : $378.75
definitely much better
Example – 15 month introductory period
But maybe the solution is to actually do a balance transfer with a card that has an introductory period for more than 12 months.
Do a balance transfer of $10,000.
Fees : $50.00
Profit if you deposit with HSBC Bank : $770.25 (at present rate)
After tax profit (assuming 25% tax rate) : $577
Net profit : $527.00 – 0% for 15 months.
Conclusion
The examples above goes to show that balance transfer profitability still exists despite many credit card issuers removing the maximum cap on balance transfer fees. The key is to avoid these cards. Remember :
Balance transfer fees matter – As shown in the examples above, read the fine prints and choose the card with either no balance transfer fee or at least cap the balance transfer fee to a reasonable level.
Length of introductory period – As the example above showed, once you take care of the fees, the introductory period matters more than having to pay a balance transfer fee itself.
Update – Rates for online banks are ridiculously low today and this technique would not make sense at this time. Nevertheless, check out our 0% balance transfer credit card page for current offers if you are looking to do a balance transfer.
