I just wanted to think out loud about special promotions of interest free periods when signing up for new credit cards.
I recently signed up for a JetStar CC which offered 0% balance transfer for 6 months. I just activated my card and they just started the ball rolling with the balance transfer.
There is also a $49 annual fee on the credit card which is charged to the card when the account is activated.
When you pay money off your credit card, the order of deductions is apparently;
So as an example; they are giving me a balance transfer of $5,500. This is interest free until 21 Nov 2010. I however am being charged $49 annual fee. I cannot pay this $49 annual fee until I pay in full the balance transfer ($5,500). So I will be getting charged interest on the $49 annual fee for 6 months at a rate of 11.99%. Provided I do NOT use the card for new purchases (which I won't) the numbers look like this.
Balance transfer amount - $5,500
Balance Transfer due date - 21 Nov 2010
Annual Fee - $49
Interest Rate 11.99% p.a.
Interest charges on $5,500 for 6 months = $0
Interest charges on $49 for 6 months = $49 x 0.1199 / 2 = $2.94 (this will be slightly more due to compounding over 6 months)
So provided I meet the minimum repayment requirements and I pay on time, I need only repay $5,500 on the 21 Nov 2010 to meet my obligations and therefore have an interest free loan of $5,500 for 6 months.
Potential to make money:
I put the $5,500 balance transfer onto my Mortgage which is at 6.48% for 6 months.
Compound Interest on $5,500 on Mortgage using A = P(1 + i)^n:
A = 5,500(1.0648)^0.5 (n = 0.5 as it is only for 6 months)
A = $5,675.40
Interest earned = 175.40
Compound Interest of Annual Fee on Credit Card + interest on fee (from above) = $49 + 2.94 = ~$52.
Tax free profit = $175.40 - $52 = $123.4
Tax free because I don't pay tax on the amount of money I save on my mortgage. Would be taxed if I put it in a savings account.
Now, the plot thickens.
the other night in the mail I received a letter addressed to the Householder from CitiBank offering me a platinum credit card. I assume the offer was made as Citibank 'assumes' I live in an 'affluent' area.
The offer is for a credit card with a limit up to $100,000. Balance transfer of 3.9% for the life of the balances transfered. Annual fee of $250. Interest charges of 20.74% for purchases.
Apply for credit card and get a $50,000 limit approved.
Compound Interest on balance transfer for 5 years; A = P(1 + i)^n
A = 50,000(1.039)^5
So therefore Interest = $10,541.
$50,000 sitting in a mortgage account of 6.48% for 5 years
A = 50,000(1.0648)^5
A = $68,440
So therefore interest = $18,440
Profit = Interest saved on Mortgage - Interest paid on Card
Profit = $18,440 - $10,541
Profit = $7,899
Tax free after 5 years as it is money saved of the mortgage, not interest earned in a savings account.
Compound Interest on $250 p.a. annual fee is a little hard to calculate as it is a geometric/arithmetic series. So I calculated it on http://www.fido.gov.au/fido/fido.nsf...tment?OpenPage
Initial Investment = $250
Regular Investment = $250 p.a.
Years = 5
Rate of Return = 20% (max allowed on website is 20%, so can't enter 20.74%)
This gives Total Amount of charges and interest of $2,854.56
So, Grand total profit is calculated as;
Profit - Compound Interest on annual fee = $7,899 - $2,854.56
So effective rate of return is calculated by the total investment (annual card fee plus interest) divided by the total profit;
$2,854.56 / $5,044 = 56.59% p.a.
So how do I balance transfer $100,000 ?
anyone know of any other good balance transfer offers out there?