The Credit Game, Level 2

As usual, I’m not an expert, just another guy that likes having extra cash, so please speak with a trusted individual and do the research before making any major decision with your money.


I had a pretty surprising response to my first post on credit, so I’d like to share another way to beat the curve, this is a little tougher to pull off, and a little more complicated to judge the value of then the regular credit card game; but can have a good payoff if the situations and (pay attention Kevin) the math is right.  It’s a bit long winded but the process is just as important as the outcome and I hope that even if you don’t have the same situation I do that you will be able to see how you can apply it to your own.  This trick will work for you if you are in the following situation:

  1. You have debt that you are currently paying off, that is liquid.  Which means that paying it down expands your available credit.  Good examples are credit card debt, and what I’ll be using in my example, Equity lines.
  2. You currently have a credit card (or two) that is not carrying any debt.
  3. That credit card company has extended you a special bonus offer for a reduced interest rate or a grace period.
It’s important to look at all the details and do your own calculations, often you can LOSE money if the math is wrong or you forget a factor.  But stick with me here, because if the math is in your favor it could mean hundreds of dollars.
I’m going to use a real life example that occurred to me recently.  I am a proud home owner (perhaps a good piece of investment advice I’ll offer if the traffic keeps on flowing for the boring money talk), and while I would have liked to have purchased it with a single loan (30 year fixed rate), like many first time home buyers, and especially home buyers in high priced markets like Hawaii, I had to get a second home loan; called a Home Equity Line of Credit, or HELOC.  The nice part about this line is unlike a fixed loan, there is no penalty to withdraw money from it as long as you have good credit.  Which means, whenever you have spare cash paying down your HELOC with it is an amazing investment, not paying interest is the same as earning it, and your money remains as liquid as it was in your checking account, minus perhaps a slight delay to transfer it back over.   The downside is this interest rate is variable, meaning that the rate of interest fluctuates daily with the prime lending rate.  The loan I have is a pretty decent 1/8 of a percent less then prime.  Although it’s a little lower now, for the sake of this example and to make the numbers nice, I’ll be assuming prime will average to around 7 1/8% next year, leaving my Equity APR at 7%.  (Side note, remember the credit game?  Think of how much you earn/save with an APR of 7% instead of 2.5%).
Yesterday my credit card company (Wamu) sent me a flyer in the mail with blank checks advertising “1.99% interest rate through April 2009”, good towards the balance on my second credit card, which I don’t normally use (another no annual fee’s card, I wouldn’t recommend having more then 2 credit cards).  The first thing I then proceeded to do was to read the small print for the catches, and there are a couple.
  • 1 time per check fee of 5% of the balance, or $150 whichever is less – Okay, because my limit is $8,000 and I’ll likely use the whole thing as this is an unused card I will end up paying $150, so I will consider this a cost of the investment and subtract it from my earnings later on.  Also important because it means an early full payment would probably mean I’ll lose money (as I hadn’t given the investment time to mature) so I made sure I can change my autopay type on that card from being “balance in full” to “monthly 
  • If not payed off by April the balance shifts to being 15% + Prime (around 20%, OUCH!) – Wamu allows you to schedule payments, so I can automatically schedule my payment for a safe date before the bad interest comes in and steals all my profits away.
  • Can’t be used to pay off other Wamu debt – Since I’ll be using this to pay off my equity line, (check the rules for your equity lines as some don’t allow for this sort of hijinks) and not another Wamu debt.  I’m in the clear.
  • Limit is spending cap on card, and there are penalties for going over your limit. – Easy enough as I don’t use this card for other purposes normally, I’ll write the check for $8000 minus fees ($150), or $7,850.
  • Must continue to make minimum payments on credit card while going – Ugh.  Makes the math more difficult, but you can see my spreadsheet below.
So, the game plan is to write the check to myself, cash it into my checking, and transfer it to the equity line.  And if during the next 11 months the difference in the APR that I’ll be paying on the credit card (2%) and the APR I would be paying on my equity line (Aprox. 7%) is more then the cost of the investment ($150) by a great enough degree to justify the labor I put into figuring it all out and the risk of a mistake on my part, I’ll bite.

So in my example, for the work and the risk I make $223.  Not bad for maybe a half hours work.  🙂  Your mileage may vary.

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