Using a 0% Balance Transfer to fund a CD

Wednesday August 27, 2008 · 129 views · 0 comments

One of my favorite blogs frequently brings up the topic of using 0% Balance Transfers from credit cards to fund other low risk investments. Jonathon, the author of My Money Blog, has written up an entire series of posts on the topic and backs his methods by having borrowed an impressive $30,000 to put to work. He earns $1000+ dollars a year on this investment approach, but also realizes that in doing so his FICO score takes a hit since it lowers his Cash flow to Debt ratio.

Although I mostly likely would never follow this investment approach, I thought it would be fun to crunch the numbers and see what you would end up with if actually took the leap and borrowed against your credit card to stick in a low risk investment, like this 5% 12-Month CD offering by Washington Mutual (WaMu).

Here are some of the assumptions I'm making going into this exercise:

You have applied for and received a credit card with a 0% balance transfer for 12 months.
The monthly minimum payments of this card is 2% of the total balance.
You plan on transferring out $10,000 into the above mentioned CD
You auto-schedule your CC payments so there is no chance of ruining the 0% offer.
WaMu doesn't go belly up on month 11 and ties up your funds such that you can't pay back the CC company who is now you charging you an outrageous 28.9% APR on the left over balance. Bye-bye earnings!!

If those assumptions hold true then the following outcome should occur.

Month End Balances

	Jan	Feb	Mar	Apr	May	Jun
CD Value	$10,042.08	$10,084.34	$10,126.78	$10,169.40	$10,212.20	$10,255.17
CC Payment Total	$200.00	$400.00	$600.00	$800.00	$1,000.00	$1,200.00

	Jul	Aug	Sep	Oct	Nov	Dec
CD Value	$10,298.33	$10,341.67	$10,385.19	$10,428.89	$10,472.78	$10,516.85
CC Payment Total	$1,400.00	$1,600.00	$1,800.00	$2,000.00	$2,200.00	$2,400.00

At the end of the twelve months you will have earned roughly $500 while paying out $2,400 dollars in credit card payments to fuel the investment. Depending on how you look at it, you might say that you either:

Made $500 free and clear since the money you borrowed was payed back and covered the costs of the CC payments, or that
you made roughly 21% since you had to dole $2400 to see that $500 return

Disclaimer: I don't endorse this style of investing, but it you are disciplined in paying your bills and don't mind have a lower borrow power, then this might be a good way to see solid returns in our Bear Market.