Author Topic: Evil badass 0% stock leaverage?  (Read 4714 times)

DaKini

  • Bristles
  • ***
  • Posts: 352
  • Location: Germany, Munich area
Evil badass 0% stock leaverage?
« on: April 30, 2014, 03:15:46 PM »
Hello, i currently read an article about debt and credit cards.
Suddenly an idea has struck me hard and its so weird i think i must overlook something.
The following should provide one with an nearly endless term 0% interest leverage opportunity, if it works and is not illegal.
We need just two credit cards that allow to borrow money on with electronig withdrawal and similar bill7ng times. The smaller card limit defines the borrowable sum.
The day after the lower card bills, i would withdraw all limit and go buy stocks. When the grace petiod ends, i withdraw the needeed ammount with the second card. Once this card bills i pay all debt with the now again available limit from the first card. I keep shuffling the debt as long as i intend to hold the stock.

What am i overlooking? Im not experienced in how cc debt works as i never had cc dept, but this idea sounds so easy i surely didnt catch the hook. Please enlighten me.

hodedofome

  • Handlebar Stache
  • *****
  • Posts: 1261
  • Age: 40
  • Location: Texas
Re: Evil badass 0% stock leaverage?
« Reply #1 on: April 30, 2014, 03:28:11 PM »
I believe it is illegal to pay off a credit card with another credit card.

Interactive Brokers offers margin at very low rates, especially if you have a lot of money. I'm paying 1.6% but it gets down to .5% if you are the billionaire type.

seattlecyclone

  • Walrus Stache
  • *******
  • Posts: 5210
  • Age: 35
  • Location: Seattle, WA
    • My blog
Re: Evil badass 0% stock leaverage?
« Reply #2 on: April 30, 2014, 03:39:01 PM »
I believe it is illegal to pay off a credit card with another credit card.

Interactive Brokers offers margin at very low rates, especially if you have a lot of money. I'm paying 1.6% but it gets down to .5% if you are the billionaire type.

It's not illegal to pay off a credit card with another credit card. It's called a "balance transfer" and lots of companies will allow you to do this. The catch is that there's almost always either a fee to perform this transaction (2-4% of the amount transferred is common) or the transaction will start accruing interest immediately. You can also take out money with a cash advance one one credit card to pay off your debt on the other credit card, but that often has an even higher interest rate than purchases.

Sometimes you will see a rare credit card offer for a balance transfer with a 0% fee and 0% interest for some period of time. Lots of people do perform arbitrage with these offers, putting the money in a savings account or some other investment until the promotional rate expires. These 0% balance transfer offers were much more common a few years ago; they have all but vanished now.

Shor

  • Bristles
  • ***
  • Posts: 480
  • Location: Orange County, CA, USA
Re: Evil badass 0% stock leaverage?
« Reply #3 on: April 30, 2014, 03:51:31 PM »
I believe it is illegal to pay off a credit card with another credit card.

Interactive Brokers offers margin at very low rates, especially if you have a lot of money. I'm paying 1.6% but it gets down to .5% if you are the billionaire type.

It's not illegal to pay off a credit card with another credit card. It's called a "balance transfer" and lots of companies will allow you to do this. The catch is that there's almost always either a fee to perform this transaction (2-4% of the amount transferred is common) or the transaction will start accruing interest immediately. You can also take out money with a cash advance one one credit card to pay off your debt on the other credit card, but that often has an even higher interest rate than purchases.

Sometimes you will see a rare credit card offer for a balance transfer with a 0% fee and 0% interest for some period of time. Lots of people do perform arbitrage with these offers, putting the money in a savings account or some other investment until the promotional rate expires. These 0% balance transfer offers were much more common a few years ago; they have all but vanished now.
Just expanding further on what was said above:

You can still find 0% offerings, but they are fewer and farbetween compared to the happy credit years (y'know before that big credit crisis thingie)
It's not illegal, as was said, but they get you in the transfer fees which is usually a percentage of the transferred amount (2% in a recent CC I got, minimum $10)
Considering you'd need to transfer every month to keep these two accounts afloat, that of course works out to a terrible 10-12% annual cost on the borrowed amount.

Alternatively, you could put it all on a 1 year 0% card, and then pray that your investments are up in the green by the time the year rolls around. Again, this is not your money, and you will put yourself in to deep water if you mis-step or fall behind on a minimum payment, or your investment fails to work out by the year's end and you can't cover it (It goes up to the fantastic rate of 16-25% interest when the promotional rate ends, or if you miss a minimum payment :) Yay!)

Also, credit transfers I believe are noted and somehow adjusted in to your credit score, which could impact your clearance for future CC deals / transfers / mortgages. So at some point, the bank can just deny you additional services if they note that you're floating a lot of debt on promotions without paying it off.

BFGirl

  • Pencil Stache
  • ****
  • Posts: 725

KingCoin

  • Pencil Stache
  • ****
  • Posts: 783
  • Location: Manhattan
  • Achieved FI @ 30
Re: Evil badass 0% stock leaverage?
« Reply #5 on: April 30, 2014, 09:06:41 PM »
Agreed that it will likely cheaper and considerably less headache just to borrow from Interactive Brokers at around 1%.

If someone throws a wrench in the gears of your credit card scheme, you may be forced to liquidate your stock at a considerable loss to cover your loan.

bigchrisb

  • Handlebar Stache
  • *****
  • Posts: 1208
Re: Evil badass 0% stock leaverage?
« Reply #6 on: April 30, 2014, 09:43:31 PM »
I did this (stock investment variant on credit card arbitrage).  In short, I did it as the market collapsed during the GFC and lost my shirt.  I was left paying out a debt out of cash flow, while stocks were depressed to generational lows.   It also came unstuck as my credit report (I think Australia has a different credit reporting system to the US) became trashed, and I ended up having a lot of trouble getting other finance for a few years.

I still use margin loans, and have done OK from them.  I look back on this as a health learning experience, but I certainly wouldn't do it again.  I also suspect that the only way for me to learn this was to do it first hand, and that I probably wouldn't have listened to people telling me not to!

Best of luck with it if you proceed. 

DaKini

  • Bristles
  • ***
  • Posts: 352
  • Location: Germany, Munich area
Re: Evil badass 0% stock leaverage?
« Reply #7 on: May 01, 2014, 01:30:11 AM »
Thanks anybody. I knew there was a catch i didnt see.
I think there is too much risk for the reward.

aclarridge

  • Guest
Re: Evil badass 0% stock leaverage?
« Reply #8 on: May 01, 2014, 09:43:24 AM »
I believe it is illegal to pay off a credit card with another credit card.

Interactive Brokers offers margin at very low rates, especially if you have a lot of money. I'm paying 1.6% but it gets down to .5% if you are the billionaire type.

Off topic: Not that I doubt you here, but why the hell do they do this? Who is the moron accepting that terrible interest rate on a margin loan? Government bonds yield more.

TreeTired

  • Bristles
  • ***
  • Posts: 451
  • Age: 135
  • Location: North Carolina
  • I think we can make it
Re: Evil badass 0% stock leaverage?
« Reply #9 on: May 01, 2014, 10:08:03 AM »
I believe it is illegal to pay off a credit card with another credit card.

Interactive Brokers offers margin at very low rates, especially if you have a lot of money. I'm paying 1.6% but it gets down to .5% if you are the billionaire type.

Off topic: Not that I doubt you here, but why the hell do they do this? Who is the moron accepting that terrible interest rate on a margin loan? Government bonds yield more.

They are overnight collateralized loans.  Government bonds that yield 3.40% are 30 year bonds.   The overnight rate is zero.  Short term govt debt yields very close to zero.   1% or even 50 bps on a high quality collateralized loan (they protect themselves by lending 50% of value, or whatever the max is)  is a good return in today's market.   Of course they also enjoy the increased business and commissions made possible by customers trading on margin, but the loan itself is viewed as a reasonable risk and return by them.
« Last Edit: May 01, 2014, 10:09:45 AM by NC_MJ »

aclarridge

  • Guest
Re: Evil badass 0% stock leaverage?
« Reply #10 on: May 08, 2014, 08:11:38 AM »
I believe it is illegal to pay off a credit card with another credit card.

Interactive Brokers offers margin at very low rates, especially if you have a lot of money. I'm paying 1.6% but it gets down to .5% if you are the billionaire type.

Off topic: Not that I doubt you here, but why the hell do they do this? Who is the moron accepting that terrible interest rate on a margin loan? Government bonds yield more.

They are overnight collateralized loans.  Government bonds that yield 3.40% are 30 year bonds.   The overnight rate is zero.  Short term govt debt yields very close to zero.   1% or even 50 bps on a high quality collateralized loan (they protect themselves by lending 50% of value, or whatever the max is)  is a good return in today's market.   Of course they also enjoy the increased business and commissions made possible by customers trading on margin, but the loan itself is viewed as a reasonable risk and return by them.

But can't you arb them by investing in a money market fund or something? At 0.5% at least, I think one would be able to find something short-term enough that has a higher yield and is pretty much risk free.

Also, can Interactive Brokers borrow at the fed fund rate? I thought that was only for larger banks - a firm like Interactive Brokers wouldn't be able to borrow at that rate (I would think) due to their relatively higher credit risk.

KingCoin

  • Pencil Stache
  • ****
  • Posts: 783
  • Location: Manhattan
  • Achieved FI @ 30
Re: Evil badass 0% stock leaverage?
« Reply #11 on: May 08, 2014, 08:52:48 PM »
But can't you arb them by investing in a money market fund or something? At 0.5% at least, I think one would be able to find something short-term enough that has a higher yield and is pretty much risk free.

Also, can Interactive Brokers borrow at the fed fund rate? I thought that was only for larger banks - a firm like Interactive Brokers wouldn't be able to borrow at that rate (I would think) due to their relatively higher credit risk.

Nope. There's pretty much no extremely low risk, low duration investments that yield more than 0.5%. Even if you can find something that yields a bit more, it's probably not worth the risk to run a million dallars worth of leverage to make a few hundred bucks.

IB is A rated, so it can borrow short term for next to nothing.