What to do with the Cash from a 0% APR?

[John B]

So after getting over my fear of opening a card I didn't actually need, I decided to go for the Chase Freedom. I had many reasons, but this is an investment thread, not a CC thread. I figure that rather than paying the card off right away, I might as well make the money work for me. Since I need the money to pay the bill off before the 0% APR runs out, I want to find an investment that is as close to risk free as possible. The options I've thought about are:

- Option 1: Put cash for each charge into a standard savings account (business as usual, just for 15 months instead of 1)
- Option 2: High Yield Savings (Mang0,Paypal Savings, etc)
- Option 3: Bond Mutual Fund/ETF: Seems to me to have more upside than option 1, maybe more than option 2. I would go with a conservative fund with. However, I realize that as with any market based investment, there is more risk than an FDIC insured account.
-Option 4: Any great ideas from the community.


Other considerations: I won't put more on the card than I don't already have in savings (i.e. even if the option lost its total value, I would still cover the payment out of other accounts.

I'm not planning on MS for this card right now.

I'm trying to start a lifestyle of maximizing ROI safely. Though I don't expect to get a huge ROI from this 15 month play, I feel like it is better than giving up the opportunity to put the money to work safely. I would appreciate any advice. Thanks!

 

[Matt]

Other considerations: I won't put more on the card than I don't already have in savings (i.e. even if the option lost its total value, I would still cover the payment out of other accounts.

Where are your savings currently out of the three options you cite?

 

[John B]

I keep a few months of savings in varying degrees of accessibility, cash/ cash equivalents, non-interest bearing checking, standard savings account (.15% APR)... everything else is mostly in mutual funds that are diversified to mitigate market volatility. It's not doing all it could right now, but I'm making a plan, this is more the first step to a lifestyle tweak than a singular event.

 

[Maggie66]

I'm interested in opinions on this topic as well. This is one method I've been circling around but haven't pulled the trigger on yet.

 

[calwatch]

If you aren't doing so already you can drop $10,000 (plus up to $5,000 in a tax refund) in I-Bonds. The interest rate is slightly higher than a regular CD but it's inflation protected. You lose the last three months of interest if you redeem before 5 years, and you cannot redeem at all in the first 12 months. Note that I Bonds operate on a calendar month basis so you should try to purchase them near the end of the month, and you get the same amount redeeming them on the first day of the month as the last day of the month.

 

[John B]

If you aren't doing so already you can drop $10,000 (plus up to $5,000 in a tax refund) in I-Bonds. The interest rate is slightly higher than a regular CD but it's inflation protected. You lose the last three months of interest if you redeem before 5 years, and you cannot redeem at all in the first 12 months. Note that I Bonds operate on a calendar month basis so you should try to purchase them near the end of the month, and you get the same amount redeeming them on the first day of the month as the last day of the month.

Thanks for the advice. I'm not sure if this is the best fit, due to the limited term of the APR, however it is something that I hadn't really thought about besides using a TIPS Rate to figure out Real Rates in Finance Class. I'll take a look at it as part of the conservative portion of my portfolio. Thanks!

 

[Free-quent Flyer]

1) High-yield savings (Mango, PayPal Prepaid, Netspend) are terrific and the best of the options you listed. They do require upkeep, Mango $50 monthly direct deposit (maybe, this requirement is very vague in their T&C), PP Prepaid and Netspend probably have their own requirements (mine were shut down so long ago I've forgotten).

Standard savings accounts don't pay enough, and ETF/mutual funds fluctuate. Who knows where the market will be in 15 months?

2) Another option if you're willing to do some work is find banks/CU's that allow you to open 3-month CD's (1-month CD's would be 3 times better, but those are more uncommon in the current interest rate environment) with a credit card. Using a 2% credit card you can earn 8% APR (4 3-month CD's) on however much you pull out of your 0% card.

 

[John B]

We decided to go for the safest of the good options and are going with Pay-Pal. We were all set to go with Mango, but then Mango wouldn't give us a card because they couldn't verify our identities. This was the same for both my wife and myself. We both have extensive US banking and credit histories so I'm not sure how Mango could not verify our identities. Pay-Pal had no problem though, so they win. Not sure what we will do over the $5K threshold. I've looked at different CD's out there, but none are doing it for me particularly. The adventure continues.

 

[WesleyM]

I'd like to bump this up and see some more opinions. I have considered this approach using a 0% card to essentially give myself a loan and would like to see the opinions here? I have a shiny new Venture 1 that I could use.

 

[Matt]

I'd like to bump this up and see some more opinions. I have considered this approach using a 0% card to essentially give myself a loan and would like to see the opinions here? I have a shiny new Venture 1 that I could use.

Check in with @Free-quent Flyer above, he did this I believe.

IMO, taking the loan with no purpose isn't really worth the effort, no purpose meaning that you use it to fund one of those 5% accounts.

If you have some ugly debt APRs, might be worth considering, but you have to maintain very strong discipline to not 'dip into' your new found wealth and really use it as an APR arbitrage.

 

[WesleyM]

I have an old personal loan that came at a time when I didnt have the best credit and as a result has a 10% APR. I think I have roughly 1.5-2 years left on it with a 4K balance and a payment of about $260 a month. It is also a pain in the ass to pay as I have to go to a partner credit union and push the payment to them with a check. I had considered converting it through the various methods into my new Venture 1 but my hang up there is the new Venture 1 only has a 5K limit due to me already having quite a bit of credit with Cap1 and I am curious what negative implications it would have on my credit score having 80% utilization on that account to start with. Or would it mostly be offset due to installment loan showing paid in full and closed? It would also mean increasing my $260 payment to roughly $333 to pay it off over the next 12 months, but that should not be a very large problem, would just mean trimming some play money out of the budget. If I'm going to take this approach I will probably do it over the next week or 2 as the monthly payment to the personal loan is due the 15th.

 

[Matt]

I have an old personal loan that came at a time when I didnt have the best credit and as a result has a 10% APR. I think I have roughly 1.5-2 years left on it with a 4K balance and a payment of about $260 a month. It is also a pain in the ass to pay as I have to go to a partner credit union and push the payment to them with a check. I had considered converting it through the various methods into my new Venture 1 but my hang up there is the new Venture 1 only has a 5K limit due to me already having quite a bit of credit with Cap1 and I am curious what negative implications it would have on my credit score having 80% utilization on that account to start with. Or would it mostly be offset due to installment loan showing paid in full and closed? It would also mean increasing my $260 payment to roughly $333 to pay it off over the next 12 months, but that should not be a very large problem, would just mean trimming some play money out of the budget. If I'm going to take this approach I will probably do it over the next week or 2 as the monthly payment to the personal loan is due the 15th.

I'd do that ASAFP. Personally, I would put that ahead of the Roth too.

 

[WesleyM]

I'd do that ASAFP. Personally, I would put that ahead of the Roth too.

What kind of negative implication do you think itd have on my credit switching it from installment to revolving debt and putting it at 80% usage? I will most likely do it just curious about that as well

 

[Matt]

What kind of negative implication do you think itd have on my credit switching it from installment to revolving debt and putting it at 80% usage? I will most likely do it just curious about that as well

You'll get a hit. I forget how much which is why I tagged FF upthread- he did it recently and did get a dent on his score IIRC.

Your credit score is not worth protecting vs paying down 10% debt IMO. Exception to that may occur if you are planning to finance something major soon, house etc..

 

[WesleyM]

No house for me until beginning of 2017 at least. Looks like thats my best decision. Now to just get it all arranged and done. Thanks for the sound advice Matt. Hopefully stock does well and I get maximum bonus at the end of the year and it gets paid off easily within that 12 months

 

[Matt]

No house for me until beginning of 2017 at least. Looks like thats my best decision. Now to just get it all arranged and done. Thanks for the sound advice Matt. Hopefully stock does well and I get maximum bonus at the end of the year and it gets paid off easily within that 12 months

If you can't afford to pay it off in 12 months you have a problem too... Try and find a way to be able to pay it off without the stock or bonus. If you can't, float less or reduce stock spending.

 

[WesleyM]

It shouldnt be a problem to pay 1k every 3 months on it, especially since I just did a large amount of debt reduction. Thanks for the help guys

 

[Free-quent Flyer]

@Matt is correct, I just did this recently. My credit score took a huge hit, but I don't really care about my credit score unless I'm setting up a CC application cycle, which I'm not anytime soon. I took ~$20k out between two 0% cards, which will let me max out more high-interest savings accounts. I plan to use the interest to pay down the CC balances over the next 15 months, then in month 14.5 pay off the remaining balances and pocket the difference.

Once the $0 balances report and my credit score recovers a month later, I'll probably do it again. I love passive income.

 

[pstravels]

You've probably already did the analysis, so just curious if you don't mind sharing. What kind of payoff are you expecting for this after the full 15 months? Probably 1k ish?

Makes sense. I don't see any reason not to do this, if you aren't going to be eating any CC apps or applying for any housing or car loans in the next 15 months.

Like Matt mentions, the discipline is probably one of the harder and less considered aspects when deciding upon whether to go this route or not.

 

[Toni Perkins]

This is interesting. I've actually been debating doing the exact same thing but using the money to pay down my student loan. We make too much to get any kind of tax benefits from the interest so I can't see any reason not to do it. Sorry if this seems like I'm high jacking your thread!

 

[Toni Perkins]

Did

@Matt is correct, I just did this recently. My credit score took a huge hit, but I don't really care about my credit score unless I'm setting up a CC application cycle, which I'm not anytime soon. I took ~$20k out between two 0% cards, which will let me max out more high-interest savings accounts. I plan to use the interest to pay down the CC balances over the next 15 months, then in month 14.5 pay off the remaining balances and pocket the difference.

Once the $0 balances report and my credit score recovers a month later, I'll probably do it again. I love passive income.

Did you do a blog post on this? I would love to read it, if so!

 

[Matt]

For $4K you won't see a huge upside over the duration. Probably about 7.5% gain. This is due to the amortization phase that the debt is in (you can see this by the level on mthly pmt being large in proportion to outstanding loan, most interest has been paid already)

In FQF case he is at $20K at 5% which is about $1K per year. The key is to ensure that you are still pushing those monthly payments somewhere too. IE in the case of the $20K example he is magicking up money, and it doesn't need to be repaid.. There could be a tendency to then slack off saving. In that example he can cash out his savings accounts and clear it all down.

However in the debt example, you get the same behavioral impact - you don't need to 'save' anymore because your payment has vanished, but really you need to be worried about that bill coming up in 12-15 months when the APR jacks up again. The way to do that is:

1. $4000 debt payment (to loan at 10%)
2. ($4000) new debt created on credit card

the above is zero sum loop for 12 -15months

• Upside is created by pushing the old monthly payments ($260) or more if you want to wipe out in 12 months ($333) into high yield savings account, so you'd capture some interest until month T-1 (month 11 or 14) and then cash it all out.

This way you double dip, get a benefit from the APR, and avoid the risk of creating a worse debt situation.

Risk is added here because if you have an emergency fund event, such as losing your job mid cycle, you are SOL.

 

[Brennan]

Just a word of caution on this...I opened up roughly 20k in new credit on 0% cards (BOA 123 Rewards x 3, Chase Freedom, and Citi DC) a few months ago to fund a new business venture and a few Mango accounts. My credit took about a 50 pt hit (agree with @Free-quent Flyer, not a big deal as I'm not planning to apply for any new cards for awhile), however, about a month ago, BOA closed all my cards with them.

Because of high balances (2 cards @ 90% utilization, 1 @ 50% with BOA) they saw me as a risky customer and canceled all cards (even my myriad of unused Alaska cards). Practically, it's not a big deal for me, as I didn't actively spend on them anyway. The 0% apr is still in effect, and I'm just paying the minimum monthly payments like I would if the accounts were open.

Just something to watch out for if anyone plans on doing something like this in the future...

 

[WesleyM]

My payment is mostly principal at this point as I've paid most of the interest by now, as I took the loan in 2011 for 10k. However, it looks like I'd save about $400 rolling it to the 0% acct as long as I do pay it on the 12 month period. The 20-30pt hit I'd probably take doing it is worth $400 as it is a temporary thing and paying it off would give me back all my points and possibly more as I make much more than minimums for that 12 month period. I also have a 12 month 0% offer sitting on my discover that has been there several months if I do in fact need to roll a little of the debt on at the end of the 12 months. I think I will do it, and will report back on my findings as far as score drop and any AA after it is done.

 

[Free-quent Flyer]

@pstravels I have my $20k for say 14 months to be on the safe side (gotta watch the exact date 0% promos reset!), so that's 14 months at maybe 5.05% APY, so around $1,178 in interest. Taxable, but that's not an issue for me.

@Toni Perkins Here's the post I wrote recently laying out the basics of what I did: http://freequentflyerbook.com/blog/2015/6/3/a-personal-finance-application-cycle

@Matt is exactly right, if you use a 0% offer to pay off existing debt, rather than maximize high-interest accounts, you need to be religiously saving up the money — above and beyond the minimum payments due! — to pay off the entire balance in month T-1. If you do not do this, and most people do not do this, you are well and truly fucked — now you have a huge balance charging 17+% APR and a ruined credit score, with no or fewer opportunities to roll the debt into another 0% APR vehicle. That's what they want. Don't do what they want.