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Arbitrage with Balance Transfer Checks

The financial gods have smiled upon me. Mere days after applying for a new credit card to extend my 0% period on about $8,800 I've spent over the past year, I discover that I'll be able to get even more free money than I expected.

I got some balance transfer checks in the mail from Discover. They've sent me some every few months, unsolicited, but I've always thrown them away without much thought. Now that 0% credit card offers are beginning to evaporate, I'm paying more attention.

The deal on these particular balance transfer checks is a fixed 1.9% APR until March 2006, with a 3% balance transfer fee, with a $5 minimum and $50 maximum on the fee. They're checks, so I can do whatever I want with them. For example, I can open a CD with them.

Six-month CDs are earning about 4% today, much better than the 1.9% APR on the balance transfer. I'd only have to worry about taxes and that pesky fee. Happily, the maximum $50 fee is reached at a balance transfer amount of only $1,666.67, but my credit line is $15,000. To avoid going over-limit, I'm only going to use $14,900. This provides a buffer for the $50 fee and approximately two months of interest at 1.9% APR — plenty of safety room.

$14,900 invested for 6 months at 4% (simple interest) will earn $298. The cost of this would be $191.55 including interest and the fee. At first glance this looks attractive — a free $100 — but after taxes it's basically a wash. It wouldn't ordinarily be worth trying to game the system, and I'm sure that's what the folks at Discover had in mind when they sent me those checks. But I'm going to game the system anyway.

I had two offers for credit cards with one-year 0% balance transfers. I already applied for one, to transfer my existing balance. Now I'll apply for the other one, transferring the $14,900 I'm about to put on my Discover card. The introductory offer with the new card has no balance transfer fees, so this essentially converts my 1.9% APR to 0% APR while extending my period to a full year.

For a mere $50 fee, plus a negligible couple days of float to cover all the transactions, I can earn about 4.3% APY on $14,900 for a whole year. That's a profit of approximately $600 (or about $375 after taxes). This is free money! Plus, I'll retain a sliver of hope that I might be able to roll the credit card debt into yet another lucrative 0% offer a year from now.

This math is based on the assumption that I'll be able to do a balance transfer to the new card for the whole amount. Given the surprise discovery of a balance transfer limit on the card I just applied for, that might not be possible. But it's not something I have to worry about — whatever portion of the balance doesn't transfer, I'll just pay off immediately. Or I might invest it — remember, it's basically a wash at 1.9%.

The timing on this is very close. I received the balance transfer checks on the 11th, and my last 0% offer is only good until the 20th! I'm going to deposit the balance transfer check at my bank tomorrow over lunch, and apply for the new card on the 18th. (I'd prefer for Discover to see my balance transfer check before they see the payment transferring it away to another card… They will Not Be Pleased™.)

If everything goes as planned, I'll have a total of about $24,000 in 0% credit card debt, with two credit cards both offering 0% on purchases with an as-yet-unknown total credit line. I'll be merrily earning 4%+ on those balances, laughing all the way to the bank.

The moral of this story is that credit card companies aren't being careful enough, so I'm going to arbitrage the hell out of 'em. Arrr! It be like piracy, 'ceptin' it be legal, arrr…

Tiny Island