Panic at the Fed

From CNN:

NEW YORK (CNNMoney.com) -- Even though the Federal Reserve slashed its key federal funds rate by three-quarters of a percentage point in an emergency meeting Tuesday, Wall Street is still betting that the central bank will lower rates again next week.

The Fed will hold a two-day meeting that wraps up on Jan. 30. And according to futures listed on the Chicago Board of Trade, investors are pricing in a 100 percent chance of at least a quarter-point cut, to 3.25 percent, and a 66 percent likelihood of a half-point cut, to 3 percent.

"There is a legitimate chance of another cut next week. The Fed wants to stay in front of things and at this stage, they'd rather err on the side of having rates be too easy than too restrictive," said Jack Ablin, chief investment officer with Harris Private Bank.

... More

I haven't been too worried about the economy. Sure, the markets have been falling, but that's what they do. They move one step backwards and two steps forward. Especially since we've seen a run up in recent months, it's to be expected. Perhaps the economy could use a recession to reset itself and prepare for stronger growth in the future.

Further, I'm in the market for the long term. I've got some time to recover from any losses.

But then the Fed cut rates. Now, I'm am not so sure.

There is a fine line between bold moves to demonstrate leadership, and flailing panic.

Cutting rates by an amount not seen in 15 years, and doing it a week before you were planning to cut rates anyway, strikes me more as the latter.

Further, out latest economic woes occurred in part because it's been too easy to get credit. The country's consumer economy is balanced precariously on mountains of credit card debt that has in recent years been turned into mortgage debt.

People who historically could not have gotten mortgages for normal priced homes were able to get short-term cheap mortgages on absurdly priced homes.

Now, as the country starts to wake up with a hangover from the heady mortgage and credit card policies on the recent years, what does the Fed do?

Does it have the country eat a healthy breakfast?
Does it have the country drink a bunch of water?
Does it make us pop a couple of aspirin? ]
Does it crack open a packet of Alka-Seltzer?

No.

The Fed has the country slam a bottle of Tequila.

You know, if a big part of our problems were caused by too much cheap credit in the economy, maybe, just maybe, dumping a whole bunch more cheap credit into the economy, might not be the best long term solution.

On the other hand, may the credit card companies will start sending me 0% balance transfers again, and I once again play at credit card arbitrage.

Credit Card Arbitrage

Most people associate arbitrage with investment banks and millionaires who travel back and forth between Europe. Many people have no idea what it is -- it just sounds impressive and scary. It doesn't have to be that way, though.

Arbitrage is really about making money from other money. If I borrow money from you and pay you 5% interest, and I loan that money to someone else at 20%, I can make money. I earn a profit of 15%. That is based on the spread between what it cost me to borrow and what I earned in lending it.

It's how banks make most of their money.

Credit card companies are alwasy trying to lure new business and poach their competitors' customers. To do this, they offer ultra low interest rates.

If you're feeling adventurous, have a high credit score, and are dilligent about paying your bill, you may be able to profit from these agressive marketing tactics.

Welcome to the wonderful world of credit card arbitrage.

Arbitrage 01: Making Money From Credit Cards

Arbitrage 02: Pitfalls

Arbitrage 03: Credit Card Transfers Only

Arbitrage 04: On Line Savings Accounts

Arbitrage 05: My Process

Arbitrage 05: My Process

Today wraps up Arbitrage Week at Cromely's World.

In the past few days, I covered the concept of the arbitrage program, some of the common pitfalls, options for more restrictive programs, and savings options. So how do you mechanically execute the program?

Execution is highly personal. It depends on your own bill paying system. If you have a system that works, there may be no reason to change it. Do what works.

The system I use relies on my favorite video game – Microsoft Money.

When I get a balance transfer offer, I deposit the cash in my checking account.

Once the check clears, I go to the ING website and transfer the funds from my checking account to ING.

Next I schedule monthly automatic transfers from ING to my checking account for the minimum payment to the credit card. Now, every month for the next 6-12 months, the minimum payment for the credit card will show up in my checking account.

Then I schedule one more automatic transfer from ING to my checking account. I schedule this transfer for two weeks before the 0% rate expires. It is for the entire remaining balance of the balance transfer.

Now that all the transfers are in place at ING, I go to Money, my banking software. Because I use electronic banking through Money, I can schedule automatic payments months in advance. I set up the monthly minimum payment to the credit card company, and the final payment.

The entire process takes about 30 minutes, including the walk to the bank to make the initial deposit. With everything set up, I just have to check my statements each month to make sure there are no problems, which I would be doing anyway.

And I can sit back, and wait for the interest to come in.

Here is a sample timetable. The dates, offers, and amounts are made up.

2007-01-03: Receive 12 month 0%, $20,000 Balance Transfer offer. The minimum payment is due on the 20th of each month

2007-01-03: Deposit balance transfer check in checking account

2007-01-10: Verify that the funds are available in my checking account

Here are the transfers I would initiate from the ING site:

Date	Amount	From	To
2007-01-14	$19,500	Checking	ING
2007-02-06	$390	ING	Checking
2007-03-06	$390	ING	Checking
2007-04-06	$390	ING	Checking
2007-05-06	$390	ING	Checking
2007-06-06	$390	ING	Checking
2007-07-06	$390	ING	Checking
2007-08-06	$390	ING	Checking
2007-09-06	$390	ING	Checking
2007-10-06	$390	ING	Checking
2007-11-06	$390	ING	Checking
2007-12-06	$390	ING	Checking
2007-12-20	$15,210	ING	Checking

And here are the ones I initiate through MS Money:

Date	Amount	From	To
2007-02-13	$390	Checking	Credit Card
2007-03-13	$390	Checking	Credit Card
2007-04-13	$390	Checking	Credit Card
2007-05-13	$390	Checking	Credit Card
2007-06-13	$390	Checking	Credit Card
2007-07-13	$390	Checking	Credit Card
2007-08-13	$390	Checking	Credit Card
2007-09-13	$390	Checking	Credit Card
2007-10-13	$390	Checking	Credit Card
2007-11-13	$390	Checking	Credit Card
2007-12-13	$390	Checking	Credit Card
2007-12-27	$15,210	Checking	Credit Card

And then I can earn about $75-$100 a month in interest. Not bad for a half hour’s work.

Good Luck!

• Arbitrage 01: Making Money From Credit Cards
• Arbitrage 02: Pitfalls
• Arbitrage 03: Credit Card Transfers Only
• Arbitrage 04: On Line Savings Accounts
• Arbitrage 05: My Process

Arbitrage 04: On Line Savings Accounts

Now that you have the cash, what do you do with it?

Put it in the safest investment vehicle you can find. You have a limited time to profit on the balance transfer. While the stock market is tempting because of the historical gains, it is not an appropriate investment for the arbitrage program. You have to at least preserve your principal for the next 6-12 months and the stock market is too volatile for that.

There may be some options among bonds, Treasury Bills, Money Market Funds, and such. There is still some risk, but I do not have the knowledge or experience with them to comment in detail.

One of the best solutions is to use online savings accounts.

Online banks offer competitive interest rates and expertise in web transactions because that is their business model. They don’t have to pay rent for branches or hire a bunch of tellers, managers, and guards to service your account

Some physical banks also offer online only savings accounts not available at branches. These accounts cost the banks less so they pay their customers higher interest.

In the past, I’ve used INGDirect.com (4.5%), EmigrantDirect.com (5.05%), and HSBCdirect.com (5.05%).

INGDirect.com pays the least interest, but it has the best website. It is easy to open and manage one or multiple accounts. If you want to open an account with them, send me your email address. If you open the account with $250 or more, ING will give you an extra $25 and give me $10.

I like ING because the account opening process was easy, and the website is intuitive. Once you have one account open (which can take several days for security purposes) you can easily open an additional account -- simply click a button.

It’s also easy to schedule recurring transfers or one time transfers a year in advance.

If you want to maximize your interest, though, HSBC is an excellent choice. It can take several weeks to open an account. And once you open an account, it can take a while to authorize your checking account for transfers in and out of the account. The security is impressive, but can also be a pain.

Once you have everything setup and can access the account, the interface is fine. The options for creating transfers between accounts work well, though they aren’t as intuitive as ING.

If you’ve used HSBC in the past and didn’t like it, you may want to take another look. They made a bunch of changes in the past year and the website is a lot better.

A unique HSBC feature is the ATM card. Unlike ING or Emigrant, they send you an ATM card so you can access your cash from any ATM. It may not be a good idea to use that at all for the arbitrage program, but it’s nice to know you can get cash in an emergency. Like if you need bail money.

Emigrant is a nice solution, too, but there’s not much to recommend it over ING or HSBC. I’ve used it in the past, and had no problems, but the interface on both ING and HSBC is nicer. It’s easier to open an account at Emigrant than it is at HSBC, and, since there’s no minimum balance, it doesn’t hurt to have an account. I just don’t find them all that compelling.

There are dozens of other high-interest savings accounts out there, but these are three of the biggest. Check them out on your own and see what you like. If you decide to open and ING account, email me.

Do your research and form your own opinion. After all, it’s your money.

• Arbitrage 01: Making Money From Credit Cards
• Arbitrage 02: Pitfalls
• Arbitrage 03: Credit Card Transfers Only
• Arbitrage 04: On Line Savings Accounts
• Arbitrage 05: My Process

Arbitrage 03: Credit Card Transfers Only

To make the arbitrage program work, you have to get the credit card’s cash into your account. Usually when the credit card companies extend a 0% offer, they include “checks” that you can use to deposit the funds in your account.

Sometimes, however, they don’t. Instead, they ask you fill out a form with the account number of the credit card you want to transfer the balance from. Or sometimes the “check” they send doesn’t qualify for the 0% offer.

So how do you get around this obstacle?

First, you can call the company that offered the 0% transfer and ask if the will send those funds to your checking or savings account.

If that doesn't work, you can use another credit card.

If the card with the balance transfer offer is card 1, then you can use card 2 (if it has a $0 balance) for the transfer. With a credit limit of $30,000 on card 1, you can do the arbitrage program for $29,500.

Do a transfer from card 2 to card 1 for $29,500 by putting the account number for card 2 on the offer form from card 1. Once the balance transfer goes through, you will owe card 1 $29,500 (plus the balance transfer fee). Card 2 will now owe you $29,500.

Call up customer service on card 2 and ask them to so send you a check for your “overpayment.” Once they send you that check, deposit it into your savings account and proceed as normal.

There is more risk involved here. You may lose a month while card two process the large payment, and then processes your refund. And since there are more players involved, there are more opportunities for mistakes.

• Arbitrage 01: Making Money From Credit Cards
• Arbitrage 02: Pitfalls
• Arbitrage 03: Credit Card Transfers Only
• Arbitrage 04: On Line Savings Accounts
• Arbitrage 05: My Process

Arbitrage 02: Pitfalls

Credit Card companies offer Balance Transfers because they want to make money. It’s that simple. They don’t expect you to take their money and stick it in a bank. There are two main ways they can make money on this program.

The first is if you actually transfer the balance from another credit card. They give you 6 or 12 months at no interest with expectation that you will not pay it all off in that time. Once the program expires, your interest rate spikes.

The second way is if you make a mistake and charge something to the credit card you are carrying the 0% offer on. Or if you miss a payment and they spike your interest.

When you follow the arbitrage program, you are costing them money. There’s nothing wrong, immoral, or illegal about it. They are taking a gamble. If they win, you pay lots of interest. If you win, you use their money for free for a period of time, earn lots of interest and then pay it all back.

So you are both gambling. To win, you need to avoid some common pitfalls.

• New Purchases
  
  Usually, the 0% offer does not apply to purchases. You should only do the arbitrage program with a credit card you already have a $0 balance on.
  
  When you make a credit card payment, the company will (usually) apply the payment to balances with a lower interest rate first.
  
  For example, Joe has a $30,000 credit limit on his visa. He spends $2,000 on clothes for whatever reason. The credit card has a 12% interest rate. Every payment he makes on that card means he will pay less interest the following month, because the balance is declining.
  
  If Joe now gets a 0% balance transfer offer, he might take $27,500 on it. That leaves him with two balances on the card – one for $2,000 at the purchase rate, and another for $27,500 at the balance transfer rate.
  
  Unlike in the first scenario, Joe will pay more interest each month because all payments he makes will go to the $27,500 balance, and none to the $2,000 balance. Additionally, since the purchase balance is not going down, but is instead accruing interest, that balance may actually go up.
  
  If you think you might need the card for purchases, the arbitrage program may not be for you.


• Universal Default
  
  Some credit card companies include this clause in their agreement with you; others don’t. It means if you make a late payment to any creditor, your 0% BT can go away and they’ll raise your interest to (in some cases) more than 30%.
  
  If there’s a chance you will be subjected to the Universal Default, the arbitrage program may not be for you.


• Credit Score
  
  Taking out a large Balance Transfer will lower your credit score. Exactly how much it will affect your FICO score is anybody’s guess. But your credit score affects mortgage rates, car loans, employment opportunities, and insurance rates.
  
  If you anticipate the sort of major life change that requires the highest FICO possible, the arbitrage program may not be for you.


• Discipline
  
  
  • Paperwork
    
    The arbitrage program doesn’t require constant attention, but you do need to closely track your bills and credit card statements. You also need to monitor your checking and savings accounts to make sure all monthly transfers are happening correctly and on time.
    
    If you don’t balance your checkbook, or keep close watch on your statements and other paperwork, the arbitrage program may not be for you.
  
  
  • Bill Paying
    
    I mentioned it before, but having the discipline to pay the minimum on the monthly 0% BT bill on time is critical. It’s also important to pay all your other bills on time during the program to make sure the Universal Default doesn’t kick in.
    
    If you aren’t absolutely sure you can meet all your monthly obligations, the arbitrage program may not be for you.
  
  
  • Chunk of Cash
    
    While you are doing this program you may have a $40,000 balance in a savings account from your 0% Balance Transfer. The whole point of the program is the give that money back after 6 – 12 months. It has to be there.
    
    If you (and others with account access) do not have the discipline to leave the cash there, the arbitrage program may not be for you.
  
  
• Random Errors
  
  Things happen. Credit card numbers get compromised. Billing errors pop up occasionally. Unexpected issues can derail the plan.
  
  If you are not comfortable handling these issues, the arbitrage program may not be for you.

For those that are aware of the risks, and comfortable managing them, the arbitrage program can be a great gamble. But beware of the pitfalls and details. And you just may beat the house.

• Arbitrage 01: Making Money From Credit Cards
• Arbitrage 02: Pitfalls
• Arbitrage 03: Credit Card Transfers Only
• Arbitrage 04: On Line Savings Accounts
• Arbitrage 05: My Process

Arbitrage 01: Making Money From Credit Cards

Please note -- Posts in my Arbitrage series describe one way a person can profit from differences in interest rates. I do not guarantee that anyone will be successful doing it. I am not a financial advisor. I'm merely a hobbiest. As with any program, there are risks that you need to evaluate for yourself. Things can go wrong. You could lose money. If you try this and it doesn't work out for you, I am not responsible. There may even be an error or two in these posts that I haven't caught yet. In short, please don't sue me.

Credit Card companies constantly poach one another's business with Balance Transfer offers. If you have a credit card, or an address, or maybe once smelled a credit card, you get these offers in the mail.

If the Balance Transfer is for 0%, you can make some money with it.

When I get a 0% Balance Transfer Offer on a credit card, I take it. I love it when the credit card company let's me play with their money for free. I stick it in a savings account and make more than 4% interest on their cash. In two years, I made $2300 using this strategy.

How to make Money from Credit Card Offers:

1. Receive a Balance Transfer offer for 0%.
   
2. Check the fee. They usually have a Balance Transfer fee of 3%, with a maximum fee of $75-$90. If there is no maximum fee (read the fine print) shred the offer, and return to your normal viewing.
   
3. Check your outstanding balance on the card. If it's anything other than $0, shred the offer and return to your normal viewing.
   
4. Check your credit limit on that card. If it's too low call the credit card company and ask them to raise your limit. How low is too low? That's up to you, but I wouldn't take the offer unless I have at least an $8,000 credit line on the card. If they won't raise your limit, or you don't want to ask them to, shred the offer and return to you normal viewing.
   
5. Check your credit limit on the card. If you have a large credit line already, you may want to see if they can raise it event more.
   
6. Check the Balance Transfer check to make sure you still get the 0% rate if you deposit it in your checking account. If not, read a future post on funneling the cash through another account. Or shred the offer and return to your regular viewing.
   
7. Check the expiration of the Balance Transfer offer. Call the company if you aren't certain. This is very important.
   
8. Deposit nearly your entire credit line in your checking account. Leave $100-$500 of available credit on the card in case something weird happens.
   
9. Once your deposit clears, transfer the money to a high interest savings account. Ingdirect, HSBCDirect and EmmigrantDirect are all great choices.
   
10. Schedule a monthly transfer for the minimum payment (usually 2-3% of the balance) from the online savings account to your checking account.


11. Make the minimum payment to your credit card one week before the due date.
    
12. DO NOT SKIP STEP 11
    
13. Pay all of your other bills on time. This is critical. This is one of the potential pitfalls.
    
14. Two weeks before the offer expires, transfer the remaining amount from your savings account to your checking account.
    
15. Make sure the payment arrives at the credit card company one week before the program expires.

Congratulations, you have now made several hundred dollars in interest that is now earning even more interest in your savings account and you owe the credit card nothing.

Lather.
Rinse.
Repeat.

• Arbitrage 01: Making Money From Credit Cards
• Arbitrage 02: Pitfalls
• Arbitrage 03: Credit Card Transfers Only
• Arbitrage 04: On Line Savings Accounts
• Arbitrage 05: My Process