Impact of CC Arbitrage on Credit Score

Following my post on Credit Card Arbitrage two days ago, Esme (from Brown Eyed Girl and Money), asked a question:

"Do you know if this balance transfer will have a negative impact on credit rating?"

Since credit scores are a complex subject, I thought I'd write a seperate post to answer that question. I will only discuss the impact of using a balance transfer for credit card arbitrage. For more general information on credit scores, The Financial Blogger has a nice series of articles.

The credit score takes into account a number of things when looking at credit cards:

1. How many credit cards do you have? Obviously, opening a new credit card account increases this. This is not necessarily a bad thing, if you don't have many of them. This raised my number of cards from 3 to 4, which should not be negative considering my credit history.
2. What is the average age of your accounts? Opening a new account, however, will "dilute" your existing credit card accounts, so the impact will be negative. I've held two of my credit cards for a long time, while the third was recent. So I've effectively cut my average by half. I'm not sure how this will impact my score.
3. What is the total credit limit accross all account? This is another area where opening a new account has an impact. However, this is not necessarily negative. Before opening my new card, I had kept my total limit quite low (about $11,000), so the $11,000 limit they granted me of this card raised my total to $22,000. I think this is still reasonable, if a bit high for my personal tastes.
4. What percentage of your total limit are you using? That is the area where you can take the biggest hit on your credit score when using a balance transfer for arbitrage. If you open a new card and max it out right away, you will increase your utilization ratio substancially. Since this is an experiment, I kept the amount drawn from the new card low, at $5,000 out of a limit of $11,000 -- which is about 45% of the credit limit. I previously had a 50% utilization ratio, so it basically remained the same.

Now, I still expect to take a hit on my credit score. But since the next time I need to negociate a loan is about 18 months away (when I renew my mortgage), it will have time to recover.

Blog Format Update

As suggested by Four Pillars, I added a RSS feed to my blog.

I have also adjusted my "Credit Card Financing at 0%" progress bar to take into account the purchase of our car shelter.

Finally, I have added a Sitemeter counter to track the number of visits to my blog.

CC Arbitrage Experiment - Update 1

In a previous article, I mentioned that I was starting an experiment in Credit Card Arbitrage. So here's an update on how things are proceeding.

On September 16th, I signed up for my new Citi card online. It took about 10 days before I received the card. They assigned me $11,000 credit limit.

There was no specific information about their 0% balance transfer offer in that mailing. However, when I called to activate the card, the agent asked me if I wante to do a balance transfer. His explanaiton were a bit confused, so I didn't sign up right away. I could only have transferred a balance from a current credit card anyway (a relatively low amount). And I don't want to give Citi the number for my other credit card anyway.

I few days later, I called again, this time specifically asking about the balance transfer offer. The agent was even more confusing. She first told me that the offer was free, and that it would be faster to do the transfer if I waited for the cheques. Then, when I specifically asked about the fees for using the transfer cheques, she mentioned that there might be a fee of 1% (she didn't sound confident, and the general documentation for the credit card indicated a 1.5% fee for using the cheques). She told me the package containing the cheques should arrive one week after the card itself did, so I decided to wait.

About 10 days after I received the card, I got a package containing cheques. However, the 0% balance transfer was not mentioned. Reading the small print carefully, I saw that the cheques would be treated as a cash advance. At this point, I was getting cold feet and decided not to go forward using those cheques.

Then, after another week, I received another package containing cheques. This time, it specifically mentioned the 0% balance transfer offer. The cheques mention that they are valid only until November 16th, and documentation provided with them mention that amounts withdrawn using those cheques will appear as "balance transfer" on my credit card statement.

Now, this is more like it. I wrote myself a $5,000 cheque that I have deposited in my account. As soon as it clears, I'll transfer it to my ING account to put it in a 4.25% 270-day GIC. This should give me about $160 in interest.

So even if there is a 1.5% charge associated with the cheque, I should still make about $85. Not much, considering the trouble. But this is an experiment meant to become more familiar with the process, so I wanted to reduce the risk even if it meant a smaller reward.

The lesson I learned until now is to be really careful and make sure the documentation is provided. Had I used the first batch of cheques, I would have been charged 1.5% for using the cheque, and this would have been a cash advance with the 19.9% interest charged from the moment the cheque was cashed in.

I will provide another update when I receive my first account statement. I expect to see that I have to make a minimum payment for my account, probably 2% of the total amount each month.

Current Asset Allocation

In the last coupleof days, I have been calculating the asset allocation for both my RRSP and non-registered accounts. I saw this as a first step towards having a global asset allocation strategy.


I detailed the asset allocation in two independent categories: geographic allocation and asset classes. I only looked at those accounts I consider there for investment, so this excludes the house, as well as my day-to-day bank account. But it includes my emergency fund and secondary bank accounts (including those in US currency).


In the geographic allocation, my assets are divided in the following way:

• Canada: 78%
• United States: 7%
• Europe: 9%
• Asia/Pacific: 6%
• Others: 1%

As you can see, I am overweigth in Canada. I expected this, as this is one of the reasons I erformed this exercise.

As for asset classes, the allocation is:

• Stocks: 58%
• Income Thrusts: 12%
• Bonds: 7%
• Cash: 16%

This, however, was a mild surprise. I would have thought I had more stocks and less cash. Of course, including my emergency funds modified the balance quite a bit. In fact, it results in about 50% cash in my non-registered assets.

Already, I can see that I need more international exposure in my stocks. I have already modified the allocation of my new contributions for my RRSP so that a bigger share of new contributions go towards the international part of my portfolio.

Car Shelter Decision

Yesterday, I called the company to ask some more questions about the new car shelter, and finalized the purchase. We are going for the more expensive option.

I believe we took the right decision for the long-term. Princess simply cannot scrape her car in the morning without risking injuring herself (she's had problems with tendons in her elbows). I cannot stand to spend money on something that will not last, and risks damaging our house.

We are using a 12 payments, no interest, financing. The expense is split 60/40 between me and Princess, like we do for all the structural expenses related to the house (our co-ownership is set up using the same ratio).

Car Shelter Update

This week, I got estimates for the replacement of the trap for the car shelter. WHile I was at it, I asked about fixing a problem that has bugged us ever since we bought the house.

With the car shelter so close to the house (they're about 12" apart for half of its length), a lot of snow get stuck between the house and the shelter. And that side of the shelter's roof is almost impossible to clear of the snow. I have no way of removing that snow during the winter, so the space fills up with snow. The problem is that if it rains, that snow becomes quite heavy, and it applies a lot of pressure on the car shelter's tarp.

It is probably one of the reasons why the trap now need to be replaced. On top of that, there is a basement window that gets completely burried in snow which will also need to be replaced soon.

So the guy who did the estimate told me that usually the type of shelter that we have is not placed so close to a house, because of that problem. To fix that, half of the shelter would need to be converted into a lean-to shelter (with a single slope).

Now, I have two estimates. The first one is just for replacing the current tarp with a new one, and is for about $1100. The second one is for converting half of the car shelter, and for a new tarp for the rest, for about $3200. Ouch!

The second choice would probably the best for the long-term, since it would last the longest and prevent further damage to the house. Princess and I will probably take this course of action, but are taking the week-end to think about it.

Net Worth Update

As of October 1st, my net worth was $47 780 (up 3.9% from $45 984).

If I exclude house-related assets and liabilities, my net worth is $36 316 (up 4.7% from $34 671).

Assets ($118 321, up from $117 089)

• Bank Accounts $4 246 (down 32% from $6 252)
• Emergency Funds $2 729 (down 3.4% from $2 825)
• RRSP Accounts $30 974 (up 9.8% from $28 213)
• Non-Registered Investments $4 214 (up 15% from $3 641)
• Home $75 600 (stable)

Liabilities ($70 542, down 0.8% from $71 105)

• Credit Cards $3 195 (down 5.5% from $3 380)
• Student Loan $3 156 (down 7.1% from $3 399)
• Mortgage $56 890 (down 0.2% from $56 994)
• Heat Pump Loan $7 247 (down 0.6% from $7 293)

This month, I moved some money to my RRSP, which negatively impacted my bank accounts. I plan on maxing out my 2007 RRSP contributions before the end of the year, as well as a $2000 repayment to my Home Buyer Plan (which is more than the minimum I have to pay back every year).

Another encouraging thing is to see my student loan melting fast. It will be fully paid back in December 2008. I never accelerated repayment of this loan, since the interests are tax-deductible. Still, it will be nice to see that one go!