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0% APR fo r18 month balance transfer credit card provides the cheapest leverage


muscleman
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I just got approved for two credit cards with 0% APR for 18 month for balance transfer. There is a 3% balance transfer fee.

So the effective cost of leverage is 2% per year.

I think this is really cheap, and better than margin loans in the stock broker.

I know the credit limit of 10k each card is probably too small to move the needle for most players in this board, but it is a reasonable amount for me and probably some other beginners.

 

Thoughts? :)

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I just got approved for two credit cards with 0% APR for 18 month for balance transfer. There is a 3% balance transfer fee.

So the effective cost of leverage is 2% per year.

I think this is really cheap, and better than margin loans in the stock broker.

I know the credit limit of 10k each card is probably too small to move the needle for most players in this board, but it is a reasonable amount for me and probably some other beginners.

 

Thoughts? :)

 

That's more expensive than the IB margin rates.  There is little risk of rising rates in that timeframe.

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if you're a beginner why would you use leverage 5 years into a bull market?

 

I think the timing is off. I did something like this in 2007, didnt work very well  :)

Not a bad idea in 2009. I think if you are a beginner best to use your own money till people start discussing the world ending on Financial news.

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I have come to learn the hard way that's it's best to use non-recourse leverage.  So just buy at-the-money call or get a loan paired with at-the-money put.

 

Look, if things take off and go straight up, you can always recoup the cost of most if not all of your volatility premium by writing covered calls (after the runup).

 

And if they drop like a stone, it costs you a lot less than if you'd borrowed money without the put.

 

And if they stagnate... well they don't normally do that.  At least not in recent years.

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I just got approved for two credit cards with 0% APR for 18 month for balance transfer. There is a 3% balance transfer fee.

So the effective cost of leverage is 2% per year.

I think this is really cheap, and better than margin loans in the stock broker.

I know the credit limit of 10k each card is probably too small to move the needle for most players in this board, but it is a reasonable amount for me and probably some other beginners.

 

Thoughts? :)

 

That's more expensive than the IB margin rates.  There is little risk of rising rates in that timeframe.

 

True, but this is non-recourse leverage vs margin account's recourse leverage.

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I just got approved for two credit cards with 0% APR for 18 month for balance transfer. There is a 3% balance transfer fee.

So the effective cost of leverage is 2% per year.

I think this is really cheap, and better than margin loans in the stock broker.

I know the credit limit of 10k each card is probably too small to move the needle for most players in this board, but it is a reasonable amount for me and probably some other beginners.

 

Thoughts? :)

 

That's more expensive than the IB margin rates.  There is little risk of rising rates in that timeframe.

 

True, but this is non-recourse leverage vs margin account's recourse leverage.

 

Okay, then the credit card leverage is certainly better given that you don't have to repay it in the event that the stock you purchase with the loan goes south.  Are you sure you don't have to repay it?  That's unlike any credit card that I've ever owned.

 

 

(the key thing is that in both cases, you need an at-the-money put to make it non-recourse leverage.  Therefore, in comparing them the interest rate alone is sufficient).

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*puts on tin foil hat*

 

I think muscleman means that the leverage is outside of your investment account because credit card risk is about as recourse as it gets! One benefit is that it eliminates the risk of margin call or systemic risk. for example, IB could (in an extremely low probability scenario) force liquidate in some sort of flash crash scenario where the options market closes while the stock market keeps moving in a violent way. there is no such risk with the credit card leverage. I think there is something to be said for having leverage outside of margin accounts and outside of investment accounts and diversifying amongst brokerages, venturing into direct ownership of shares and other ways of reducing systemic risk to your holdings even if the puts you own have you x% hedged and there is no conceivable way of getting a margin call

 

*takes of tin foil hat*

 

Leverage is cheaper at IB, just do that.

 

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I just got approved for two credit cards with 0% APR for 18 month for balance transfer. There is a 3% balance transfer fee.

So the effective cost of leverage is 2% per year.

I think this is really cheap, and better than margin loans in the stock broker.

I know the credit limit of 10k each card is probably too small to move the needle for most players in this board, but it is a reasonable amount for me and probably some other beginners.

 

Thoughts? :)

 

 

These can be good opportunities, but IMO you need to be selective about which ones you take and which ones you don't.

 

Back in 2006 or 2007, I could find 0% credit cards for one year or 18 months with no cash advance fee.  At the time, I could also find term deposits that paid 4%.  Well, from my perspective, that's a no-brainer.  If you can get a $25k credit limit, you just take the cash advance, put it in the term deposit and you make a free $1,000 of interest arbitrage.  It just costs you an hour or two of your time to fiddle around with the paperwork.

 

Back in 2008, I received an offer for a credit card that charges 1.99% interest on cash advances for the life of the balance.  All I have to do is make the monthly payment, which cuts into my cash flow.  So, again, it struck me as a no-brainer to take advantage of what is effectively $27,500 of low cost, long-term float (just need to make the $200-300 monthly payment).  With the proceeds, I just invested as I normally do, because it's for life, so there's no need to worry about duration matching...so there is no need to restrict myself to arbitraging.  So, even assuming that I make a return of 6% on the investment, it's still a net of 4%, about $1,000 annually.

 

Since that time, I've not found any offers that were as attractive.  If I find another opportunity to make some easy money, I'll probably jump at it (and it's really kind of fun to screw around with a bank!).  It doesn't really do very much to move the needle, but a $1,000 for a couple hours of paper work seems like a great deal to me.

 

 

SJ

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I just got approved for two credit cards with 0% APR for 18 month for balance transfer. There is a 3% balance transfer fee.

So the effective cost of leverage is 2% per year.

I think this is really cheap, and better than margin loans in the stock broker.

I know the credit limit of 10k each card is probably too small to move the needle for most players in this board, but it is a reasonable amount for me and probably some other beginners.

 

Thoughts? :)

 

That's more expensive than the IB margin rates.  There is little risk of rising rates in that timeframe.

 

True, but this is non-recourse leverage vs margin account's recourse leverage.

 

Okay, then the credit card leverage is certainly better given that you don't have to repay it in the event that the stock you purchase with the loan goes south.  Are you sure you don't have to repay it?  That's unlike any credit card that I've ever owned.

 

 

(the key thing is that in both cases, you need an at-the-money put to make it non-recourse leverage.  Therefore, in comparing them the interest rate alone is sufficient).

 

The bank who does the balance transfer for me merely transfer to my checking account.

They don't mind what I do with it.

 

Citibank is very generous. They even increased the limit to 20k after I request

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No offense, but using a credit card's 0% introductory rate to borrow money for a year and a half seems like a really really bad idea. There is a considerable risk that over a short 18 month time frame whatever you decide to buy is going to move against you and you will have to liquidate other holdings to payoff the credit card balance before the 10%+ interest rate takes effect. Thus this is just like using margin in your IB account.

 

You could invest in a corporate bond that comes due in your time frame but what is that going to yield? The spread after paying 2% to borrow is 3 maybe 4%? So you are going to make $800...

 

What is maxing out two credit cards going to do to your credit rating? Over the long term I'm sure it will be fine, but what if you need to access credit during or in the near term after maxing out your cards? Good luck.

 

ITM call spreads can be had very cheaply. I wrote a lot of $10-$20 BAC call leaps in February of this year at an effective interest rate of <1%. Listen to Eric on this one. He has engineered some brilliant options trades that take advantage of cheap and even free leverage. 

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I've done this several times with 0% offers and no transfer fee.  Is it possible to deduct the transfer fee as one does the interest on a margin account?

 

I'm sort of with the other posters who stated that the time to do this was 2008 and 09, probably not the best idea now.  If I was going to do it now I probably would not buy equities, maybe a closed-end muni fund like PMX, which is not without risk, but has sold off and now yields 8%.   

 

Thanks,

Lance

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Two people have mentioned that the time to use this strategy was around 2009 which isn't saying that much since pretty much any long strategy was an awesome one if you bought in march 2009. But if my memory serves these 0% offers dried up almost completely for 2009 and just started coming back in late 2010.

 

I used this strategy in combination with a simple MM account in 05-06 and picked up a nice spread.

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Two people have mentioned that the time to use this strategy was around 2009 which isn't saying that much since pretty much any long strategy was an awesome one if you bought in march 2009. But if my memory serves these 0% offers dried up almost completely for 2009 and just started coming back in late 2010.

 

I used this strategy in combination with a simple MM account in 05-06 and picked up a nice spread.

 

 

No, the reason why 2008 or 2009 was the best time for this strategy has nothing to do with equity markets.  Rather, the reason why pre-2009 was the best time for this strategy is that the credit card offers were much better. 

 

Clearly, a 0% credit card with no cash advance fee is a no-brainer if you can get a high enough credit limit.  Even if you just take the cash advance and put it in a zero-risk certificate of deposit, you'll come out a winner.  Back in 2006 or 2007 I was able to use this interest-arbitrage technique to borrow at 0% and invest at the then risk-free rate of 4%.  If you can get a credit limit of $25k, then you'll earn $1,000 for an hour or two of paperwork and horsing around.

 

Then in 2008 and 2009, it was possible to get a CC with 1.99% interest for the life of the balance.  Since the rate is guaranteed for the life of the balance, you don't face any short-term volatility risk if you take the cash advance and just invest it.  Siegel would suggest that the long-term rate of return from equities is about 6.5%+inflation, so even if you were unlucky and only got half of that, you'd come out as a winner over the long-term.

 

Moving ahead to 2013, the problem is that the CC offers are less attractive.  They tend to be for 12-18 months of duration, and they tend to have a net borrowing cost of 2-3% annually.  Unfortunately, this means that interest-arbitrage is no longer very attractive because it's hard to find a certificate of deposit that pays much more than your 2-3% cost of borrowing.  You are no longer well compensated for your hour or two of paperwork and buggering around.

 

If the offers for CCs become more attractive in the future, I'll get back into that game.  If you are only making $1,000 or $2,000 per year from it, you won't see much of a difference in your portfolio.  However, free money is free money.  And it is very satisfying to screw-over a bank! ;D

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I have explored this opportunity but found it to be not worth the hassle for the following reasons:

 

1.  In order to borrow any amount of money that would move the needle on most people's portfolios, you'd basically have to take a hit on your credit score.  It doesn't make sense to me to try to skim a few percentage of a short-term loan just to end up paying an extra 50bps on a home loan or car loan.  You'll end up hurting yourself economically in the long-run.

 

2.  If your portfolio is so small that the credit offered to you is large relative to your portfolio, your profit is so small that it's not worth the risk.  Risk bouncing a credit card payment, hurting your credit and basically spending hours juggling something that will make you a few grand at most is not worth it. 

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I have explored this opportunity but found it to be not worth the hassle for the following reasons:

 

1.  In order to borrow any amount of money that would move the needle on most people's portfolios, you'd basically have to take a hit on your credit score.  It doesn't make sense to me to try to skim a few percentage of a short-term loan just to end up paying an extra 50bps on a home loan or car loan.  You'll end up hurting yourself economically in the long-run.

 

Absolutely.  You need to monitor the impact on your credit worthiness.  As long as you don't go too crazy, your credit score drops a few points for a couple of months after you apply, and then it can also drop if the ratio of credit outstanding over credit extended gets too high.  But for most people who have a couple of existing credit cards and pay them off monthly, the credit usage ratio is not really a problem.

 

In Canada, interest on consumer credit is not deductible for income tax purposes (unlike mortgage interest in the U.S.).  As a result, it generally makes good sense to pay off consumer debt before investing (ie, if your marginal tax rate is 40% and you're paying 5% interest on consumer debt, you would effectively get a risk-free pre-tax return of 5%/(1-.40) by simply paying off your debt).  As a result, buggering around with credit cards really makes most sense when you've already paid off all your consumer debt, at which point who really cares about your credit score?

 

2.  If your portfolio is so small that the credit offered to you is large relative to your portfolio, your profit is so small that it's not worth the risk.  Risk bouncing a credit card payment, hurting your credit and basically spending hours juggling something that will make you a few grand at most is not worth it.

 

 

Yeah, it doesn't do much to move the needle because it's not scalable.  But, that's a similar problem to odd-lot investing.  Individually, these actions just don't amount to much, but if you can find 4 or 5 such opportunities per year, then it can provide at least a little bump to a portfolio.  The labour component is definitely there, but it really only amounts to an hour or two of work for each CC offer that you exploit.  I guess it's up to each person whether $1,000 is adequate compensation for an hour or two of administrative work. ::)

 

   

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  • 4 weeks later...

Even if you don't have to pay any interest for 18 months, wouldn't carrying a balance month-to-month count as a late payment and kill your credit score?

 

I only have one credit card and I never use it, so I don't know anything about this stuff.

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