Balance transfer - would you?

[formerexpat]

I have a Citicard that is offering 0% until 11/1/2012 with a 4% transaction fee; so essentially a 2.67% loan for the next 18 months.

Would you do it?

[qofcc]

To refinance higher interest debt, I would and I did take that deal. To invest? not a chance.

[dancinmama]

No, because I don't have any balances on any of my credit cards.

What is the interest rate AFTER the 0% expires. That should be taken into consideration too unless you are sure that you can pay if off before you hit the higher rate.

[mithrin]

Apr 28, 2011 9:58:43 GMT -5 formerexpat said:

I have a Citicard that is offering 0% until 11/1/2012 with a 4% transaction fee; so essentially a 2.67% loan for the next 18 months.

Would you do it?

It's not equivalent to a 2.67% loan, which you would be paying down during the 18 months. A 2.67% loan for 18 months would actually generate interest payments of 2.13% of the original loan amount. A 4% upfront fee for an 18 month term is more like a 5% loan (you'll pay 4% of the original balance for financing).

If you intend to only pay the minimum payments, and then pay off the bulk of the BT right at the end, then you'd be closer to the 2.67% number as the effective rate.

I wouldn't do it.

I don't have any higher rate debt to pay off, and I only earn 3% on my checking account. With this offer, on say 10K BT, it would cost $400 in finance charges, and I could make somewhat less than $450 in interest over 18 months. Seems like a $50 profit until you take into account that I'll owe income taxes on the $450, which are going to be more than the $50.

But we really can't give you advice without knowing what you intend to do with the money, how likely you are to miss a payment deadline and have the interest rate change, how likely you are to be able to pay off the BT next October, etc.

[WannabeWealthy]

How are you making 3% in a checking account? What bank?

[Gardening Grandma]

In response to the OP, the only way I'd do it would be if I were carrying a balance on a higher interest card that I knew I could pay off in 18 months.

I'd also like to know what bank gives 3% on checking....And if it has an upper limit. I'm getting 2.5% on checking at my credit union, but they limit it to the first $10K. Then it's only a quarter of a percent on anything above $10K.

[formerexpat]

If you intend to only pay the minimum payments, and then pay off the bulk of the BT right at the end, then you'd be closer to the 2.67% number as the effective rate.

This is exactly what I would do. It would be slightly higher than 2.7%.

I wouldn't put it in checking or savings.

The only debt I have higher than 2.7% is a car loan at 2.99% and my mortgage at 5%. I wouldn't make the move for just 20bps, or $20 on $10k and probably wouldn't do it for 230bps either - that would barely pay for a nice dinner out with the wife.

There are a few moves that I have in mind for investing that I would make if I did see this though.

There will be no problems paying it off in the time frame. 100% certain.

[Plain Old Petunia]

I would do it if I had some high interest debt, even if I didn't think I could pay it off in 18 months. In the meanwhile, the lower rate would help you reduce the balance. Just do the math. Where will you be in 18 months if you do the BT vs where you will be if you don't. Which scenario puts you closer to a zero balance? Pick that one.

[mithrin]

Apr 28, 2011 11:53:52 GMT -5 Gardening Grandma said:

In response to the OP, the only way I'd do it would be if I were carrying a balance on a higher interest card that I knew I could pay off in 18 months.

I'd also like to know what bank gives 3% on checking....And if it has an upper limit. I'm getting 2.5% on checking at my credit union, but they limit it to the first $10K. Then it's only a quarter of a percent on anything above $10K.

Mine's similar, 3% on the first 20K and 0.5% on additional. I WISH the 20K limit was a problem for us...

It's a Rewards Checking Account with the usual requirements:
eStatements
Direct Deposit or use bill pay online
Use debit card X times per month

My account is at my local CU. The RCAs have taken a beating with the interest rates staying so low--this account used to pay 4% until they cut the rate 6 months ago. I don't think any of the national banks have these kinds of accounts, so you need to check with the CU's in your area. Some of them can be found here:
www.money-rates.com/rewardschecking.htm#fill-table

Their list isn't comprehensive though; my local CU doesn't show up.

[resolution]

I wouldn't do it because I am not much of a gambler. I couldn't time the market to save my life, which is why I have ended up in mostly long held index funds. However I remember seeing an offer earlier this year with a 3% balance transfer fee instead of the 4%. Have you shopped around at all to see if you can find a 3% deal?

[Plain Old Petunia]

Apr 28, 2011 12:00:35 GMT -5 formerexpat said:

If you intend to only pay the minimum payments, and then pay off the bulk of the BT right at the end, then you'd be closer to the 2.67% number as the effective rate.

This is exactly what I would do. It would be slightly higher than 2.7%.

I wouldn't put it in checking or savings.

The only debt I have higher than 2.7% is a car loan at 2.99% and my mortgage at 5%. I wouldn't make the move for just 20bps, or $20 on $10k and probably wouldn't do it for 230bps either - that would barely pay for a nice dinner out with the wife.

There are a few moves that I have in mind for investing that I would make if I did see this though.

There will be no problems paying it off in the time frame. 100% certain.

I think it is iffy in the short-term, but you may come out ahead. Remember, the 4% is up front, not annualized. If you do a 10k BT today and pay it off tomorrow, it is still going to cost you $400. That is substantially more than 2.67 APR.

Why not just cash flow into the investment monthly? Is it something which requires a lump sum?

[mithrin]

Apr 28, 2011 12:00:35 GMT -5 formerexpat said:

I wouldn't put it in checking or savings.

There are a few moves that I have in mind for investing that I would make if I did see this though.

I've done plenty of BT offers, even have 5K out right now on a no-fee BT; but I wouldn't use the BT money as investment capital. 18 months is a very short time horizon for investments, what if your principal goes down and you can't pay off the BT on time?

If your reply is that you would pay it off using your EF, then don't get the BT. If you're willing to put some portion of your EF at risk, then just go ahead and invest it? What's the difference whether you have 20K in your EF and a 10K BT invested in something vs. 10K in EF, 10K invested, and 10K in credit limit available? The only real difference I see is that you didn't pay the $400 in finance charges by forgoing the BT.

If an emergency hits that needs the extra 10K while it's tied up in investments, you can use your CC to cover the difference, and probably find a 0% BT offer to tide you over until you unwind the investment. Not much different than if that emergency struck just when you were having to pay off the BT while the investment was down, meaning you needed your EF for the emergency and couldn't use it to backstop the investment risk.

My point is that using BT money for investments carries a risk. If you're going to limit your BT to be small enough that you can cover it with your liquid assets, it's functionally the same as just using those assets directly. The only time a BT helps you make a profit is when you're taking out more than you can backstop and accepting the risk that you might have problems when the BT comes due, or if you take out BT money and only put it in guaranteed accounts (CDs or high interest accounts), where you'll earn enough of a spread between the BT fee and interest to cover taxes and take a profit. Easy enough to do when the BT fee is zero, but not worth the effort at 3-5%.

Taking out small enough BTs that you can cover them if the investment goes south is just playing a shell game to justify to yourself putting some of your EF into investments. Imagine you take out 10K in BT into your checking, then write a check for the investment--is the BT money the investment, or was it your EF that got invested and the BT money is earning simple interest? Money is fungible, so it's just as valid to say that the BT money is just keeping your EF balance high enough for comfort while you risk some of the actual EF, as saying you didn't touch your EF and are only investing with BT money.

[formerexpat]

Have you shopped around at all to see if you can find a 3% deal?

I wouldn't get a new card just for the offer. It's just one that my CC was offering so I decided to mull it over.

what if your principal goes down and you can't pay off the BT on time?

If your reply is that you would pay it off using your EF, then don't get the BT. If you're willing to put some portion of your EF at risk, then just go ahead and invest it? What's the difference whether you have 20K in your EF and a 10K BT invested in something vs. 10K in EF, 10K invested, and 10K in credit limit available? The only real difference I see is that you didn't pay the $400 in finance charges by forgoing the BT.

My "EF" is basically entirely in the market. Paying off this BT will not be an issue; I could pay off my house tomorrow if I wanted but decide to keep the >$300k loan.

This is purely a ploy to make an investment spread on something that could / would be considered as a gamble by some. I could lose in the short term [i.e. over 18 months] but for a cost of 2.7% on the money, I might be willing to play around...especially because I'm young.

[Angel!]

Apr 28, 2011 11:11:36 GMT -5 mithrin said:

Apr 28, 2011 9:58:43 GMT -5 formerexpat said:

It's not equivalent to a 2.67% loan, which you would be paying down during the 18 months. A 2.67% loan for 18 months would actually generate interest payments of 2.13% of the original loan amount. A 4% upfront fee for an 18 month term is more like a 5% loan (you'll pay 4% of the original balance for financing).

Interesting. I consider myself to be fairly math savy, yet had never actually thought this through. Although, when I do BT offers I pay the minimum until the interest rate expires, so it is still a fairly accurate calc to divide the rate by the time period.

As far as the loan, wouldn't do it unless I had higher interest debt to pay off or needed the money.

[mithrin]

Apr 28, 2011 15:04:33 GMT -5 formerexpat said:

Have you shopped around at all to see if you can find a 3% deal?

I wouldn't get a new card just for the offer. It's just one that my CC was offering so I decided to mull it over.

what if your principal goes down and you can't pay off the BT on time?

If your reply is that you would pay it off using your EF, then don't get the BT. If you're willing to put some portion of your EF at risk, then just go ahead and invest it? What's the difference whether you have 20K in your EF and a 10K BT invested in something vs. 10K in EF, 10K invested, and 10K in credit limit available? The only real difference I see is that you didn't pay the $400 in finance charges by forgoing the BT.

My "EF" is basically entirely in the market. Paying off this BT will not be an issue; I could pay off my house tomorrow if I wanted but decide to keep the >$300k loan.

This is purely a ploy to make an investment spread on something that could / would be considered as a gamble by some. I could lose in the short term [i.e. over 18 months] but for a cost of 2.7% on the money, I might be willing to play around...especially because I'm young.

I wholeheartedly agree with not paying off the mortgage, which is both low interest and long term. I'm just not willing to risk putting BT money in the market because if another crash happened, I wouldn't want to be forced to sell while I'm down because the loan is due. I'll take that risk by not paying off mortgage and student loan debt because 1) I can service the debt with my monthly cash flow and 2) the lengths of those loans are much longer, giving me a longer investment horizon. I'm not comfortable with BTs have 12-18 month horizons.

Since you have more of a risk tolerance, my advice is to throw out a few scenarios to see how worthwhile this could be. What return are you expecting with this timeframe? Remember to account for the min. payments you'll need to pay out along the way. What profits can you realize after taxes? If your after tax income doesn't balance out the 4% fee, then don't bother.