Credit Card 0% balance transfer promotions

[RazzaDazzla]

G'day guys,

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;
Interest
New Purchases
Balance Transfers

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.

The Maths
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.

A scenario;
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
A= $60,541
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/SavingsInvestment?OpenPage
Using:
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
= $5,044

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?

 

[poverty]

Balance transfer arbitrage used to be a pretty good gig but I think it's mostly dried up now. Hardly any 0% offers around and most of the low rates seem to now be for 6 month instead of 12 etc. Might become more useful again if RBA keep pushing up mortgage/savings rates tho.

 

[bellenuit]

One of the issues you may come up against is how do you make use of the credit available to you in your new credit card account. If you are given a $50K credit limit and you make a cash withdrawal from the credit card account of this amount so that you can deposit it in a mortgage or offset account, won't you pay a transaction fee for the cash withdrawal that is not an insignificant amount? It will vary by institution, but that is something to bear in mind.

 

[poverty]

One of the issues you may come up against is how do you make use of the credit available to you in your new credit card account. If you are given a $50K credit limit and you make a cash withdrawal from the credit card account of this amount so that you can deposit it in a mortgage or offset account, won't you pay a transaction fee for the cash withdrawal that is not an insignificant amount? It will vary by institution, but that is something to bear in mind.

I know with citibank you can request a convenience cheque for your available credit, no fee. They send you the cheque you stick it in the bank/mortgage, then balance transfer the money away from citibank to your groovy 0% offer etc.

 

[RazzaDazzla]

Balance transfer arbitrage used to be a pretty good gig but I think it's mostly dried up now. Hardly any 0% offers around and most of the low rates seem to now be for 6 month instead of 12 etc. Might become more useful again if RBA keep pushing up mortgage/savings rates tho.

I guess it is one of those things that comes and goes as competition for credit cards goes up and down.

It obviously costs the CC companies money to lend money for balance transfers at no or low interest. But then this cost would be offset by the 20% interest rates charged to other poor b@stards.

Another thing to be cautious of is the CC companies rules and their 'rights' to change the rules whenever they see fit! One slip up and you could be caught out paying 20% interest on $10K! All it would take would be one telephone operator to tell you the wrong date and your in a world of trouble!

As for getting the money, I believed that if your credit card was in credit you could ATM withdraw or transfer any amount in credit? Or do some cards have rules where any withdrawal or transfer is a cash advance even if you are in credit?

Also, in the past I believed some CC companies requested a photo copy of your current CC that you were balance transferring to? Lately it seems like tell them a dollar amount and a credit card number and they'll transfer the cash!

Perhaps this thread could become a way to keep us credit card arbs aware of what deals are out there? The Citibank one I quoted came with a 'code' that needed to be quoted. Obviously to prevent those of you who don't live in such affluent areas as myself from signing up for the esteem that comes from one of their Platinum cards!