Is this a stupid idea, financially?

In My Humble Opinion
1

So I got a set of those credit card access checks from my CC company. If I act now, I can get up to my credit limit, 20,000, in cash advances for the low low price of 1.99% plus a 3% fee (max $75) good until June 2007

Assume I took 10K and invested it into a 6 month CD. Right now I can find 6 month CDs paying 5%, which means after 6 months I would have 250 in earnings from the CD.

The total cost of the cash advance would be $75, plus about $20 in interest, for a total cost of 95 bucks.

It looks like, to my math, that I am 155 profit from this transaction, correct?

What are the pitfalls of this? I would not get close to my max balance, so no overlimit fees. I would have to be careful not to incur any late fees, which would eat up my money very quickly. Did I calculate things correctly? Are there fees or anything associated with CDs that I should be aware of?

2

As long as you’ve done all your calculations correctly, it seems ok to me. I did something similar with a 0% advance, putting it in my online savings account at 4% or so for 6 months. As far as I can tell, it’s legal and works. People invest in the stock market on margin, and that’s a similar concept, with higher risk.

3

READ THE FINE PRINT!

If you do this, the very most important things you absolutely MUST do is (1) take the card out of your wallet and DO NOT USE IT FOR REGULAR PURCHASES NO MATTER WHAT, and (2) make sure to contact ANY vendors you may have set up to auto bill your credit card for monthly or yearly services or renewals and stop those auto billings.

The way these checks work is, if you keep using your card, any payments you make get applied to the balance with the lowest interest rate first. That means that the $500 you charge the month after you’ve cashed one of these handy-dandy checks, sits on your account at the highest interest rate on your card (possibly up to 28%) until June 2007, as does every other penny you charge on that card in the course of normal use over that period. EVEN IF you pay that $500 in full on the next billing statement. EVEN IF you pay off every cent of your “current” charges on each and every statement. By the time June 2007 rolls around and you cash out that CD to pay off the remaining, original $10,000 loan, it will have cost you plenty more than $155 in interest on all your other purchases.

If you do this (and make no mistake, I’m not recommending against it – we took advantage of 0% interest for well over a year on one of our cards, and financed several thousand dollars in moving and renovation expenses we otherwise might not have been able to afford at the time), PUT THAT CARD AWAY and get a shiny new card to use for everyday charges. Oh, and make damn sure that you’ve paid the balance IN FULL and that there are no pending charges that will appear on the next billing cycle BEFORE you even think about writing one of those checks.

4

It works as long as you are careful with your timing, but it’s a large debt to carry for such a small return (under 1%) over a 6 month cycle time. From a cash flow perspective, I’d advise against it. With inflation, the original $10,000 at day 1 is arguably more valuable than $10,155 at day 180. Which is why most investments with borrowed money go into stock, real estate, etc. where the return is more likely higher than the rate of inflation. As always, however, don’t invest money you could never afford to loose.

5

I’d be nervous about something like this since all of the various limits and deadlines associated with credit cards are not always obvious, and the companies can really mess with your financial health if you make a mistake. But I’m a financially conservative guy in general, and particularly where credit cards are concerned.

I guess this scheme just seems like a lot of trouble, and unecessary exposure to potential pitfalls, for around $150 profit over six months.

6

[QUOTE=crazyjoe]
So I got a set of those credit card access checks from my CC company. If I act now, I can get up to my credit limit, 20,000, in cash advances for the low low price of 1.99% plus a 3% fee (max $75) good until June 2007
[/QUOTE]
1.99% per what? 1.99% per term or per annum would work

If it’s 1.99% per month, then I think you may have done your sums wrong.

7

[QUOTE=Mangetout]

1.99% per what? 1.99% per term or per annum would work

If it’s 1.99% per month, then I think you may have done your sums wrong.
[/QUOTE]
Indeed, the math is incorrect. Even if crazyjoe were making installment payments against that loan every month until next June, the total amount he’d pay back would be around $10,067.00, give or take a dollar (http://www.bankrate.com/gookeyword/calculators/credit-cards.asp – based on 7 monthly payments). That makes the total cost of the loan $142. But it’s more if he’s not paying it down monthly, probably somewhere in the neighborhood of $115 (I think – I hope someone will correct me if I’m way off). Add that to the $75 fee and the cost of the loan shoots up to approximately $190. Take that from the $250 he stands to make on his 6 month CD, and he’s now only “profited” $60.00. Not much of a windfall.

8

If you have to ask whether an investment is bad, it very likely is. You’re talking here about a setup where you get a minimal return as long as you do everything exactly right, and stand to lose a lot of money if you don’t. What’s to like?

If you’ve got $10,000 to invest, you’ve got enough to open a money market account. You’ll get slightly more money than you would with this scheme, but it’s as close as you’ll get to a risk-free investment.

9

[QUOTE=Shayna]
Indeed, the math is incorrect. Even if crazyjoe were making installment payments against that loan every month until next June, the total amount he’d pay back would be around $10,067.00, give or take a dollar (http://www.bankrate.com/gookeyword/calculators/credit-cards.asp – based on 7 monthly payments). That makes the total cost of the loan $142. But it’s more if he’s not paying it down monthly, probably somewhere in the neighborhood of $115 (I think – I hope someone will correct me if I’m way off). Add that to the $75 fee and the cost of the loan shoots up to approximately $190. Take that from the $250 he stands to make on his 6 month CD, and he’s now only “profited” $60.00. Not much of a windfall.
[/QUOTE]

Holy cow, I did indeed get the math wrong there, 2% * 6/12 * 10,000 is a lot closer to 100 than it is to 20. Don’t know how I messed that up.

See, I knew there was a reason not to do this, but when I was doing the math I couldn’t figure out why I should turn down a free 150 bucks. If it’s only a free 60 bucks, well, then, I am not sure the risk in timing everything exactly right.

Thanks to everyone!

10

[QUOTE=crazyjoe]
See, I knew there was a reason not to do this, but when I was doing the math I couldn’t figure out why I should turn down a free 150 bucks. If it’s only a free 60 bucks, well, then, I am not sure the risk in timing everything exactly right.
[/QUOTE]

If you have a payoff that requires you to take a risk and turns into a loss if that risk doesn’t pan out, can you really call it free? That sounds more like gambling to me.

11

[QUOTE=ultrafilter]

If you have to ask whether an investment is bad, it very likely is. You’re talking here about a setup where you get a minimal return as long as you do everything exactly right, and stand to lose a lot of money if you don’t. What’s to like?

If you’ve got $10,000 to invest, you’ve got enough to open a money market account. You’ll get slightly more money than you would with this scheme, but it’s as close as you’ll get to a risk-free investment.
[/QUOTE]
I believe the point is, he doesn’t have $10k to invest. He’d be borrowing that $10k from his credit card company at 1.99% APR, then immediately investing it in a CD that gives him 5% APY. At the end of the term on his cc loan, he’d cash out the CD, pay off the debt in full and pocket the difference. He did some preliminary math and wondered why that scheme wouldn’t work to make him a few extra bucks at the end of the term.

Well, if he uses it properly, it might, but not with any significant return. (I did find a “balloon payment” calculator here, which confirms my guess of $115 was pretty darn close – with no payments for 7 months, the final “balloon” payment if he carries a $10k loan at 1.99% APR is approximately $10,116.60). That’s if this is one of those “make no payments until such-and-such date” deals. He may have to make periodic payments afterall, in which case he can’t tie that ten grand up in a CD, because he’ll need over $1,400/month to make his minimum payments.

And even if he invests it in one of the online savings banks, such as emigrantdirect, where he’d earn a little more than 5% APY, but could draw on it whenever he wanted without penalty, then he doesn’t get the benefit of earning the full $250 he calculated on keeping $10k in the bank for the full period – he earns less and less each month as the balance goes down, so it really may end up costing him more than he’d earn, depending on the details of the terms.

Personally, I think the consequences of carrying that kind of balance on a credit card, in an effort to net less than $60 in the end, isn’t worth the hit one would take on their credit score. And it certainly won’t win you any points if you try to get any other kind of loan over the next 7 months, and in fact, could cost you quite a bit more in higher interest rates on any new loans due to having such high outstanding balances.

If you need the cash for expenditures, it’s not a bad loan if you manage it properly. It’s not, however, a very good use of funds for investment purposes.

12

[QUOTE=Waverly]
With inflation, the original $10,000 at day 1 is arguably more valuable than $10,155 at day 180. Which is why most investments with borrowed money go into stock, real estate, etc. where the return is more likely higher than the rate of inflation. As always, however, don’t invest money you could never afford to loose.
[/QUOTE]
I think you’re figuring this wrong. It doesn’t matter if the investment matures faster than the rate of inflation because it’s not his money. If you’ll give me a loan at 2%, and I can invest it at 3%, it doesn’t matter to me if inflation is at 4%, or even 20%. I still make 1% off of whatever the principal is. A higher rate of inflation just means that the loan at 2% was a bad investment for the loaner.

I’m going to buck the trend and say that this might be a good idea, simply because you can determine and manage the risk yourself (this requires doing the math right). The risks are: that you will be late paying it back, that you will forget about a recurring charge, that you will forget and use the card for some other purchase, that you will need a loan in the near future and the credit rating hit will cost you more than you gain, and that you missed something in the fine print

You can mitigate the possibility of an accidental charge by putting the money in savings account rather than CD, so you can get it back immediately if you need it. Some online banks return 5+%. The money is FDIC insured, so the investment itself is without risk.

But, I agree, $60 is a pretty small return for all that work.

13

[QUOTE=iamthewalrus(:3=]
I think you’re figuring this wrong. It doesn’t matter if the investment matures faster than the rate of inflation because it’s not his money.
[/QUOTE]
Actually, it is his money, with the important caveat that to get that 10k he actually owes the bank that gave it to him an even larger amount. Monies being fungible, he starts the scheme in the hole until he finds an investment that pays enough to cover the costs. I’m suggesting that such an investment should go beyond costs and cover inflation, and then some, or it is a bad idea.

14

Shayna raised another point I wasn’t thinking about, as well: minimum payments. Used to be you could make a 10 dollar minimum payment and that was that. Federal regs changed the minimum payments you had to make, and so now they would be considerably higher. I’d have to fork out hundreds of dollars of my own money each month to pay down the balance, and that right t here makes the $60 profit not worth it.

15

[QUOTE=iamthewalrus(:3=]
But, I agree, $60 is a pretty small return for all that work.
[/QUOTE]
Not to mention that you’re suddenly carrying a big debt that may affect any debt you may actually need to secure during the scheme. The one time in 100 that it turns around to bite you in the ass is going to harm you way more than the $60 will help you.

For the amount of time, effort and risk you put in, and the reward you get, you should just spend a few weekends shoveling driveways instead.

16

[QUOTE=crazyjoe]
Shayna raised another point I wasn’t thinking about, as well: minimum payments. Used to be you could make a 10 dollar minimum payment and that was that. Federal regs changed the minimum payments you had to make, and so now they would be considerably higher. I’d have to fork out hundreds of dollars of my own money each month to pay down the balance, and that right t here makes the $60 profit not worth it.
[/QUOTE]

I’m doing something similar, but with different terms. CC company kept sending checks with lower and lower rates. 6.99%. 5.99%. 4.99%. I finally bit at 1.99%

If you are thinking about doing this, call up the credit card company and see if they will do the following:

  1. Extend the loan term

  2. Eliminate the fee.

Citibank offered me 1.99% for the life of the loan, plus they eliminated the fee. I did not think that they would do it, but all I did was ask and they did. I actually wanted the money for home improvements, but ended up not using it. So I put it in a money market fund yielding 5.1%.

Minimum payment is $72, of which about $8.30 is interest. Meanwhile, I’m making about $20 in interest. After taxes, that’s going to net me about $9 per month.

It’s not something I would have done just for the $9 per month, but I did plan on using the money for something worthwhile, and the funds are still there if I do need them. I’m just in no hurry to pay it off until the yield onthe money market fund drops. I would not have done it if the offer was only for 6 months, and I would not have done it with a huge fee.

In the meantime, I simply have not used that card at all. As others have said, if I charge anything to it, the low interest rate balance will be paid off first and the purchase will be last. And Citibank has slowly hiked the interest rate for new purchases from 9% to 20%, setting a trap that they hope I will fall in. I won’t, but only because I have another card that I use when I need to charge something. If you don’t have that, forget about it.

If you do decide to do this, put the money in a money market mutual fund that you can write checks on so you can pay it back when you need to. You do not want to use CD’s that might not mature until 5 days after the credit card bill is due. And be aware that banks (yours, theirs, everyones) love to put 10 day holds on $10,000 checks. They will do it every chance they get.

Four weeks after I cashed the loan check, Citibank sent more checks. This time at 0.99%. I should have waited.

17

Warning. Some CC companies after they get you there, suddenly seem to “lose” your payment for a day or so until it’s “late” whereupon your interest rate goes astronomical, and fees pile up, and you even get overlimit fees. “What’s in Your Wallet” dudes have tried that to me.

And, you have little recourse. Can you *prove * they rcvd your payment, if they don’t cash the check for a day or so?

This is a VERY bad investment idea.

Now, sure- paying off a bunch of high rate CC with a low rate can be a good idea.

A hint- if you have your CC from a real bank, with branches, you can pay your bill there in person, and you have proof of payment.

18

[QUOTE=Waverly]
Actually, it is his money, with the important caveat that to get that 10k he actually owes the bank that gave it to him an even larger amount. Monies being fungible, he starts the scheme in the hole until he finds an investment that pays enough to cover the costs. I’m suggesting that such an investment should go beyond costs and cover inflation, and then some, or it is a bad idea.
[/QUOTE]
Yes, he’s obligated to pay it back, but that doesn’t mean that he has to beat inflation while he has it.

Which is great, because $10K is what he’s getting from the bank, and $10,155 is what he’s paying back. He doesn’t have to beat inflation to profit on this; he just has to beat the rate of the loan. Sure, a higher return on the investment makes his profit better, but it’s not necessary, and it exposes him to higher risk. An FDIC-insured savings account is as close to 0 risk as there possible, and as far as I can tell you can control the remaining risks. (read that contract carefully!)

Yeah, but you also have to consider the satisfaction you get by taking money from the credit card companies instead of doing real work ;).

19

[QUOTE=DrDeth]
Warning. Some CC companies after they get you there, suddenly seem to “lose” your payment for a day or so until it’s “late” whereupon your interest rate goes astronomical, and fees pile up, and you even get overlimit fees. “What’s in Your Wallet” dudes have tried that to me.

And, you have little recourse. Can you *prove * they rcvd your payment, if they don’t cash the check for a day or so?

This is a VERY bad investment idea.

Now, sure- paying off a bunch of high rate CC with a low rate can be a good idea.

A hint- if you have your CC from a real bank, with branches, you can pay your bill there in person, and you have proof of payment.
[/QUOTE]

This isn’t a problem. All of the CC companies I deal with now take payments online, and deduct them from my checking account.

20

[QUOTE=crazyjoe]
This isn’t a problem. All of the CC companies I deal with now take payments online, and deduct them from my checking account.
[/QUOTE]

That brings up another can of worms, like when they keep taking payments out after you no longer owe, or they clean out your checking account to pay off the entire balance, or…