Author Topic: If you wouldn't pay off a 3% mortgage early, why pay off a credit card?  (Read 9592 times)

bb11

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Serious question. You can find just about any credit card these days offering a 0% APR balance transfer for 12 months (if not more) for a 3% balance transfer fee. So effectively your interest rate is 3% per year. How is this any different from a mortgage? You could continue transferring it to new cards year after year, and invest what would have been the payment to erase the debt to pay it back whenever you felt like stopping, plus pocket all the gains above 3% you would have made.

See my journal in my sig for a bit more on the topic. Note that I'm not actually planning on doing this (have been looking for cards with no balance transfer fee like Chase Slate), but at the very least I'm not sure why more people wouldn't take advantage of the 0% APR period til it's about to expire. If I open a new card in January every year, I can invest instead of paying expenses all year until December and then pay the entire year's worth of expenses at once. If my card expenses are $10k every year, I should make pn average several hundred dollars every year doing this.

Obviously you don't want to recommend this method to someone just starting out. But for a disciplined financial individual it seems pretty low risk. I think the big risk would be that you can't pay off the balloon payment in December due to a down market, but having a sizable emergency fund (which many people do) mitigates this. Am I missing something else?

marty998

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 I think the big risk would be that you can't pay off the balloon payment in December due to a down market, but having a sizable emergency fund (which many people do) mitigates this. Am I missing something else?

You recognise the problem.

My take on this is why do people want to complicate their lives with more loans/cards?

I have 1 transaction account, 1 savings account, 5 mortgage loan accounts + 1 offset account, 2 credit cards, 2 shares accounts and 1 margin loan account.

That's more than enough for my poor head to keep track of. You'd be mad to want more.

I once saw a case study where someone posted up 3 car loans, 10 student loans and 12 credit and store cards... the mind boggles at how anyone can do that without going stir-fried crazy.

2Cent

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@marty:
You can manage many accounts with little effort if you take a little time to organize and properly automate your payments. The only time you have to look at that account is once a year, so the effort is quite small for a 3% loan. Especially if you do it all in single day and keep all the information at hand.

Paul der Krake

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Issuers won't issue credit forever. You might be able to rollover 20-30k indefinitely, not much more. Say you get 5% return vs a 3% balance transfer fee. So you're looking at about $400-$600 profit. Except the 0% APR card typically has a 12-18 months timeline before ballooning to a much higher interest rate, with no guarantees that you would be able to find another transfer card later. Of course you could alleviate that by keeping a substantial cash position that earns next to nothing.

tl;dr: the risk premium isn't high enough.

I'm a red panda

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but having a sizable emergency fund (which many people do) mitigates this.

Research seems to show this isn't true for the vast majority of Americans.

slappy

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I recently transferred a smallish balance ($4500) to the Chase Slate card and this thought occurred to me as well.  For me, it was a matter of monthly payments. Granted, the payment is only $45 a month right now, but my end goal in paying off all my debt is to decrease my monthly payments so that I don't have to work 50 hours a week to pay for everything.  $45 is still $45 that I'd rather not have to pay.  It is nice to have the flexibility, though. So if something happens and I can't pay it off by my goal date (way ahead of the end of the 0%), then I have the flexibility to pay that small payment.  I also have another $6200 on a 0% interest Home Depot card. So between those two cards, the payments are about $100.  So if I paid both of them off, that's an extra $100 of breathing room, which will be very helpful in my particular situation. 

forummm

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Also, credit card interest isn't tax deductible while a mortgage is.

GuitarStv

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Also, credit card interest isn't tax deductible while a mortgage is.

Only via a complicated multi-year plan known as the Smith Maneuver.

blue mutant

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Smith manoeuvre is a Canadian workaround to make mortgage interest deductible in Canada but my understanding is that it (mortgage interest) is always deductible in the states.

I'm a red panda

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Smith manoeuvre is a Canadian workaround to make mortgage interest deductible in Canada but my understanding is that it (mortgage interest) is always deductible in the states.

Assuming you have enough deductions to go over the standard deduction.  A small mortgage, you are often better off not itemizing (so you get no 'benefit' from holding the mortgage).

nereo

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Smith manoeuvre is a Canadian workaround to make mortgage interest deductible in Canada but my understanding is that it (mortgage interest) is always deductible in the states.

Correct.  However, even among people who hold mortgages, a large percentage of them do not benefit from the mortgage interest deduction because of the AMT or because of the relatively small amount of interest paid with today's low rates (i.e. it is less than the standard deduction).  At today's rates (<4%) it's very difficult for a couple to get the mortgage interest deduction if their mortgage is <$200,000.

bb11

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 I think the big risk would be that you can't pay off the balloon payment in December due to a down market, but having a sizable emergency fund (which many people do) mitigates this. Am I missing something else?
You recognise the problem.

My take on this is why do people want to complicate their lives with more loans/cards?

This is true. I think one more account is a very marginal account more work, but it's not a huge gain.

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Issuers won't issue credit forever. You might be able to rollover 20-30k indefinitely, not much more.

Good point, although I don't imagine increasing the amount forever.

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tl;dr: the risk premium isn't high enough.

This is what I think may be the case. Although the risk seems really low for someone on this site. You're borrowing money for 0% interest.

Quote
Research seems to show this isn't true for the vast majority of Americans.

I'm referring to the people on this site when I say "many people do".

Jack

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I've been rolling over a ~$5k balance at 0% interest (plus 3% transfer fee) for a couple of years now. In my case, the balance got created because I actually needed the "springy debt." I haven't paid it off yet because I prioritized maxing my HSA, 401k and IRAs above it, but now that those are squared away keeping the balance is no longer worth the hassle. I'll pay it off shortly before September (when the intro rate expires).

Technically, it would still be mathematically optimal to keep rolling it over (especially since in my case, the alternative is paying down student loans), but the interest rates are close enough that avoiding the hassle wins over mathematical optimality. If it were a much larger balance, my decision might be different.

VaCPA

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Smith manoeuvre is a Canadian workaround to make mortgage interest deductible in Canada but my understanding is that it (mortgage interest) is always deductible in the states.

Correct.  However, even among people who hold mortgages, a large percentage of them do not benefit from the mortgage interest deduction because of the AMT or because of the relatively small amount of interest paid with today's low rates (i.e. it is less than the standard deduction).  At today's rates (<4%) it's very difficult for a couple to get the mortgage interest deduction if their mortgage is <$200,000.

Regarding USA income tax : Mortgage interest is allowed under AMT, so people caught in that still benefit from the mortgage deduction. Your other point is the main reason why someone might not benefit though. In LCOL areas, and states with no income tax, people sometimes struggle to exceed the standard deduction and thus see no tax benefit of carrying a mortgage.

nereo

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Issuers won't issue credit forever. You might be able to rollover 20-30k indefinitely, not much more.

Good point, although I don't imagine increasing the amount forever.


On its face, there's nothing wrong with continually transfering cc debt in order to keep it <3% and increasing your difference.

However, it differs from a mortgage in two key ways
1) a mortgage can be fixed for the entire amortization period
2) there's no guarantee that you can continue to transfer from one card to another perpetually.

#1 is easy enough - your mortgage is fixed.  Looking at #2 - consider what happened during the credit crisis when it became very difficult to do the kind of credit card churning you are now describing.  Also consider that, buried in the fine print of your credit card contract are almost always terms that allow the credit card company to change their terms with only 30 days notice. 

If you have the money on hand to pay off your debts when necessary go ahead - but beware that terms can change and that historically credit (and credit transfers) have not always been readily available.
« Last Edit: May 04, 2016, 09:31:06 AM by nereo »

bb11

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It seems that may be the heart of the matter Nereo. There are just enough things out of your control that the risk isn't worth it long term.

Kaspian

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For me, shuffling around credit card debt (even at 0%) is just like sweeping dirt under the carpet because you have better uses for your time and can clean it up later.  Sure, it's not hurting anything there, but seriously--why the fuck bother?   If I want to play games with myself, I'll boot up the Playstation or do a crossword puzzle.

frugaliknowit

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The banks do this for a reason:  On a large scale, they end up making money on it.  People don't pay it off within a year, or pay it off so soon, the "3%" is more like at 15% yield, etc. etc.

For your hack to work, you'd have to do everything perfectly, then happen to have a market gain exceeding 3% (after tax) to make money.  Not exactly a "slam dunk" worth my time.

Hacking introductory Airline miles is more my cup of tea.   Guaranteed airline ticket...

BarkyardBQ

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I think the big risk would be that you can't pay off the balloon payment in December due to a down market, but having a sizable emergency fund (which many people do) mitigates this.

This is exactly what you SHOULD NOT DO. Don't invest your payments. Our strategy is basically, put all expenses on to the cards, maxing out our accounts to the point where contributions go in equally until October. This leaves us with enough cash each month to pay the mortgage and two cash required utility bills and enough to dump into savings so that 2017 IRA's are ready by October. October-December we will stash cash to make the payments in January on the first two cards and hold and save the cash for the Slate payment in May. When the 0% expires the cards are paid off and will be closed, then DW and I will switch which of us opens the new cards.

We do this to front load multiple (457/403)*2 retirement accounts. Maxed by October 1 using 0% Amex Blue Cash Preferred and 0% Citi Double Cash Back and moving the balance to Chase Slate. The first two cards have 0% til February 2017 and Chase until May. Chase Slate is 0% balance transfer fee for any transfers for the first 60 days. Combining cash back and interest (for 2017 IRAs) in 1% savings, nets about 3.5% based on our spending*, not including returns/dividends on the shares purchased. Who needs coupons when you have math? At a minimum this wipes the interest on our mortgage.

Our mortgage is 2.875% with 14 years remaining, and yearly isn't more than the standard deduction. We should be FI in 5 years and planning to FIRE in 8. Contribution/Savings Rate does more for our goal then expected growth. We cannot control the return rate, but we can control to some extent how much is there to grow. Our jobs are extremely stable, so our tolerance favors putting math to work for us as long as possible. The flat market/volatility for the past 15 months has prompted us to contribute as much as possible early in our FIRE journey, we started last January.

A couple more thoughts...

It's not for the risk averse, people with unstable income, or people who SHOULD have an emergency fund.

It's not sustainable. You have to weigh the risks of carrying over a balance to a new card (and possibly a new year) if you can't pay it off. You have to know for yourself how much you're comfortable rolling over year after year or when you might have to slow the retirement contributions. You're borrowing against time and your ability to pay it off quickly when the time comes. Getting in the market sooner for longer beats not investing for a short time to pay off cards in the future.  I'm comfortable in a scenario where we do this for a couple years, get half way through a year of front loading and then turn off contributions for a month or two, pay off the current card, and continue contributions as long as we can still max out the deferred savings by year end (for tax savings and buckets you don't get back). The goal is to still pay them off completely by end of the 0% term, but I could see getting comfortable rolling balances as long as we can get 0% monthly and on balance transfers.

*Amex Preferred Blue Cash 6% Groceries, 3% Gas, 1% everything else, except we use Citi to get 2% cash back. Discover 5% gas for 3 months. Most of our card spending is groceries and gas, and we can churn the 6% for gift cards for some other purchases.
« Last Edit: May 04, 2016, 10:27:28 AM by BackyarBQ »

HipGnosis

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I haven't carried a balance on a credit card in years.
How do you propose I start?

bb11

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I haven't carried a balance on a credit card in years.
How do you propose I start?

You'd just open up a new 0% APR card and put your expenses on it for a year while only making the minimum payments. Instead of using cash for everything you'd be investing the money.

kendallf

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I have been doing this for a couple of years, with a few small wrinkles: one is that I don't transfer balances.  Instead, I open a new 0% intro rate card a few months before the old one expires, switch to the new one for all expenses, then pay off the old one before interest starts accruing.  This saves paying the balance transfer fee. 

I have about $20k riding in this fashion most of the time, on 3 or 4 cards, with ~$10-12k cash available to pay off one or two if need be and the rest available in a HELOC and investment accounts that I could raid if necessary.  I chose to do this so that I could max tax-advantaged accounts while paying fairly heavy home renovation costs as I get a house ready to sell, as well as save vs. the 4% rate on the HELOC, which I would otherwise use.

I might be able to continue doing this indefinitely; my credit score keeps going up as my utilization rate is still very low, even with a sideline of getting rewards cards in addition to the 0% cards.  I keep a spreadsheet with card and rate details; all of the payments are automated.  However, I intend to wind it back down when the house sells; I just don't like the mental weight of knowing it's all out there and making sure I don't miss keeping track of stuff. 

For example, last year Ally changed their online bill pay service and a couple of my cards' auto payments were canceled.  I didn't catch it until I had missed a payment by a day or two and gotten charged a late fee.  I was able to call and get them to remove the fee, but I don't want the hassle.  A few mistakes like that and I'd be watching my credit score drop and the intro rates disappear.

boarder42

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i may need to start doing this to front load my IRAs then pay it off with my year end bonus.  though i plan to be ahead after this year on my IRAs anywyas.

bb11

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I have been doing this for a couple of years, with a few small wrinkles: one is that I don't transfer balances.  Instead, I open a new 0% intro rate card a few months before the old one expires, switch to the new one for all expenses, then pay off the old one before interest starts accruing.  This saves paying the balance transfer fee. 

Yes that's pretty much what I'm on board with. I'm ok with a one time free transfer to a card like Chase Slate, but other than that I'd just open up a new card every year. Between the leveraging gains and the sign-up bonus it seems like easy money.

Paul der Krake

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I have been doing this for a couple of years, with a few small wrinkles: one is that I don't transfer balances.  Instead, I open a new 0% intro rate card a few months before the old one expires, switch to the new one for all expenses, then pay off the old one before interest starts accruing.  This saves paying the balance transfer fee. 

Yes that's pretty much what I'm on board with. I'm ok with a one time free transfer to a card like Chase Slate, but other than that I'd just open up a new card every year. Between the leveraging gains and the sign-up bonus it seems like easy money.
The bonuses on the 0% cards are typically far inferior to what can be had on other cards.

zephyr911

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I let about $18K ride on a card at 0% (in this case, not even a transfer fee) for the last 10 months. Just paid it off in advance of the rate expiration, after earning thousands on the invested equivalent. It's a viable strategy if you have a high SR and don't mind managing the debt.
Once I've re-established a credit score near 800 and start getting good offers again instead of the loan-shark offers brought on by my recent "high utilization", I'm considering cash-advancing $5-10K toward new investments, including possibly another startup or my taxable stock account.

For me, shuffling around credit card debt (even at 0%) is just like sweeping dirt under the carpet because you have better uses for your time and can clean it up later.  Sure, it's not hurting anything there, but seriously--why the fuck bother?   If I want to play games with myself, I'll boot up the Playstation or do a crossword puzzle.
If all you can see is a mess on the floor, you're missing the bigger picture. Taking on debt and using it to earn higher returns than the APR you pay is not merely acceptable, it is standard practice at many, if not most, successful companies. Like the old banker's rule of thumb, borrow at 3 and lend at 6...
My company borrows at anywhere from 3% to 12% (preferably the low end) and even high-rate debt (for short periods) can accelerate large transactions whose earnings more than compensate for the cost, round out cash flow issues, and keep your equity invested in profitable assets. Despite our typical net cap rate being below 10%, we see leveraged returns 2-4x that high. There's no reason an individual human being can't do the same thing.

tobitonic

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We did pay off our 3% mortgage early, so we'd naturally do the same with a credit card.

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fishnfool

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Also, credit card interest isn't tax deductible while a mortgage is.
< This!

BarkyardBQ

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Also, credit card interest isn't tax deductible while a mortgage is.
< This!

No it's not, but depending on your income level, and tax deferred options it might be. If you're in the 15 or 25% tax brackets, deferring even $10k to investments while holding 10k  (or rolling it over yearly)could easily save someone as much as 1500-2500 in taxes a year, which is a better return than a mortgage tax deduction.

zephyr911

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Also, credit card interest isn't tax deductible while a mortgage is.
< This!

It is deductible if you borrow expressly for business use, including rentals or self-employment, and possibly for a taxable investment account (I'd have to read up, not sure).

And it still beats mortgage interest if the after-tax cost is lower - which does happen. I don't itemize because my mortgage interest is less than half our standard deduction and we barely have anything else. So 3.375% really is 3.375%. It'd be an effective 2.87% if we did itemize, but if you're being honest, even the tax savings only applies to the marginal amount above the standard deduction.

By comparison, credit card debt can might carry the OP's example of 3%, or even truly 0% - I really did get a no-fee no-interest offer on a card with a $26K limit, and gladly used the better part of it. That float earned me more money than we paid in mortgage interest the entire year. Way more flexible for cash-flow management purposes than a mortgage too. Open-ended interest calculation, tiny minimum payment, flexible amortization, etc.