July 16, 2007

arbitrage on?

I received a solicitation letter from First National Bank Omaha today. The offer was 1.99% APR on balance transfers in the first three billing cycles, for life.

Almost immediately, I thought about doing some more arbitrage. Meaning, I envisioned getting a high credit limit on this card, getting that amount transferred to another card, withdrawing the credit balance, and then investing that money in my HSBC online savings account.

The spread would be *roughly* 3% (because HSBC's APY is 5.05%, and I'm too lazy and stupid to figure out what the APR is). Assuming I get a $30k credit limit and, for calculation's sake, transfer/withdraw all of that, I'd get:

$30,000 x .0505 = $1,515 in interest income for the year

However, with that $30k in the negative books, so to speak, I'd owe:

$30,000 x .0199 = $597 in interest expense

Of course, since I'd be making minimum payments to the credit card monthly, the total interest expense for a year would probably be less. Let's say it'd be about $550 (I may be way off).

That'd leave me with $1,015. Yet, that is before we factor in taxes. Let's use the 28% bracket and calculate from there:

$1,515 * .28 = ~$424

That means after deducting for interest and taxes, I'd have:

$1,515 - $550 - $424 = $541

Personally, that's not much of a return, and certainly not worth weakening my already weakened (from past arbitrage efforts) credit score. Long story short -- nice idea, but just not worth it. Now, if the credit limit was $100k, that'd be a different story. ;)

No comments: