Update on CC Arbitrage Experiment

Yesterday, I received my first monthly statement for the credit card I used for my arbitrage experiment.

The good surprise was that I was charged no fee to use the balance transfer cheque. Whoo-hoo!

As I expected, I will have to do a minimum payment each month, which for this month is $105. This is not too bad, at 2.1% of the current balance.

I will pay this out of my regular income, as if I was putting money aside for investment. However, this means that if I had wanted to run this with no impact on my regular cash flow, I would have to put aside a part of the initial amount for these monthly payments. This could be segmented by 3-month periods (since ING Direct offers GICs for 90, 180 and 270 days).

The exact run-down of this, with a $1000 arbitrage for 12 months (to keep things simple and make it easy to multiply the amount), would be something like:

• Leave $62 in the regular savings account -- this will cover the first 3 monthly payments.
• Put $57 in a 90-day GIC -- to cover minimum payments for the next 3 months.
• Put $54 in a 180-day GIC -- minimum payments for months 7 to 9.
• Put $51 in a 270-day GIC -- for the last 3 minimum payments.
• Put $776 in a 1-year GIC -- this will be the final balance at the end.

All of this assumes that the minimum payment is based on the running balance of the account.

Of course, this would somewhat reduce the total interest gained for the arbitrage. But like I said, this would eliminate the impact of the arbitrage on my regular cash flow.

Net Worth Update

As of November 1st, my net worth was $46 579 (down 2.5% from $47 780). The decrease was due to the replacement of the car shelter.

If I exclude house-related assets and liabilities (that includes the car shelter financing), my net worth is $37 367 (up 2.9% from $36 316).

Assets ($124 747, up 5.4% from $118 321)

• Bank Accounts $3 747 (down 12% from $4 246)
• Emergency Funds $3 747 (up 37% from $2 729)
• RRSP Accounts $31 999 (up 3.3% from $30 974)
• Non-Registered Investments $4 542 (up 7.8% from $4 214)
• Home $75 600 (stable)
• Arbitrage $5 000 (new)

Liabilities ($78 168, up 10.8% from $70 542)

• Credit Cards $6 171 (up 93% from $3 195)
• Student Loan $2 911 (down 7.8% from $3 156)
• Mortgage $56 785 (down 0.2% from $56 890)
• Heat Pump Loan $7 198 (down 0.7% from $7 247)
• Arbitrage $5000 (new)

This month, instead of moving $500 directly to my RRSP account, I parked it in my emergency fund. Since I would not have a big enough amount to make a purchase, this way it will generate some interests. I'll do the same in the future, until the amount is big enough to matter. Then I will transfer it to my RRSP account, where it will be available when an opportunity presents itself. Since I have until February 2008 to max out my 2007 RRSP contributions, putting my money straight into my RRSP account where it does not generate much interests would not be as efficient.

Obviously, the replacement of the car shelter had a big impact on my net worth, since I am financing it on my credit card (12 monthly payments without interest). However, since this is a house-related expense, Princess will be transferring me her share of it every month, which increases my cash flow.

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.