Author Topic: Use credit card convenience checks to invest?  (Read 987 times)

El_Viajero

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Use credit card convenience checks to invest?
« on: September 14, 2019, 02:56:09 PM »
I often get convenience checks from the banks that issue my credit cards. These usually go right to the shredder, but today I got some and started thinking...

The offer is 0% interest for a year. There's a 4% transaction fee. Say I wrote myself a check for $1,000 and invested it in my Vanguard funds. I might even invest it in my SEP IRA. Assuming I pay it all back over the course of a year (or, better yet, nearly all at once on the last day of the 0% interest period) so as not to incur any interest, it seems like I'd definitely come out ahead when one considers the value of the shares purchased at today's price in terms of their long-term gains in value, not to mention the tax deduction I get by investing via the SEP IRA. All I have to do is beat the $40 fee.

Is it that simple or am I missing something? Would Regulation T come into effect here?

4% is also slightly better than the 4.125% interest on my mortgage.

ketchup

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Re: Use credit card convenience checks to invest?
« Reply #1 on: September 14, 2019, 03:09:18 PM »
Look up "stoozing".  This is absolutely A Thing.

El_Viajero

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Re: Use credit card convenience checks to invest?
« Reply #2 on: September 15, 2019, 08:18:18 AM »
Yeah, I suppose it's just a form of stoozing. I guess there's nothing particularly novel about the idea.

Blueberries

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Re: Use credit card convenience checks to invest?
« Reply #3 on: September 15, 2019, 10:18:35 AM »
Beyond work, this allowed me to pay off my student loans rapidly.  I think the trick is to ensure you're getting back more than you're giving and you don't get that guarantee in the market.

WalkaboutStache

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Re: Use credit card convenience checks to invest?
« Reply #4 on: September 16, 2019, 05:44:50 AM »
What is the 4% transaction fee?  Wouldn't that count as 4% yearly interest?  I can see how you might want to pay down your mortgage with that, though when you consider the interest deduction it may not make sense. 

If you are sure that the market will be up 4% by the end of the one year period, then you are much smarter than the average bear since you can time the market.

Blueberries

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Re: Use credit card convenience checks to invest?
« Reply #5 on: September 16, 2019, 08:37:56 AM »
What is the 4% transaction fee?  Wouldn't that count as 4% yearly interest?  I can see how you might want to pay down your mortgage with that, though when you consider the interest deduction it may not make sense. 

If you are sure that the market will be up 4% by the end of the one year period, then you are much smarter than the average bear since you can time the market.

With the tax laws, how many are itemizing still?  I couldn't find exact rates from 2018, but this is interesting:

"The Joint Committee on Taxation estimates that the number of filers who itemize will fall from 46.5 million in 2017 to just over 18 million in 2018, meaning that about 88 percent of the 150 million households that file taxes will take the increased standard deduction."

https://taxfoundation.org/90-percent-taxpayers-projected-tcja-expanded-standard-deduction/

talltexan

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Re: Use credit card convenience checks to invest?
« Reply #6 on: September 17, 2019, 08:25:38 AM »
On average you will out-earn the 4%. If you do this enough times, you will do it into the teeth of a bear market, which will wipe out your equity.

These credit access checks can very quickly turn into loans that have high interest rates or get called. I'd recommend leverage of this type only at maybe 50% of money that you already have, i.e. put $2,000 of your own cash alongside the $1,000 access check.

v8rx7guy

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Re: Use credit card convenience checks to invest?
« Reply #7 on: September 17, 2019, 09:25:45 AM »
You can safely assume a return greater than 4% over a long period of time, but you cannot assume you will win over the time span of a year.  It's a gamble.

El_Viajero

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Re: Use credit card convenience checks to invest?
« Reply #8 on: September 18, 2019, 11:37:33 AM »
You can safely assume a return greater than 4% over a long period of time, but you cannot assume you will win over the time span of a year.  It's a gamble.

But wouldn't the long-term return be the more salient of the two since I'd be holding the shares for a period of several years? Here's how it seems to me: For a hypothetical $1K investment that costs me $40, the gains on the shares that I buy in 2019 would need to exceed $40 between the day I buy them and the day I withdraw the money as cash. That's 15 or 20 years for me.

So, isn't the real gamble whether the gains on that investment exceed $40 over the lifetime of my ownership of said shares?

EvenSteven

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Re: Use credit card convenience checks to invest?
« Reply #9 on: September 18, 2019, 11:44:35 AM »
You can safely assume a return greater than 4% over a long period of time, but you cannot assume you will win over the time span of a year.  It's a gamble.

But wouldn't the long-term return be the more salient of the two since I'd be holding the shares for a period of several years? Here's how it seems to me: For a hypothetical $1K investment that costs me $40, the gains on the shares that I buy in 2019 would need to exceed $40 between the day I buy them and the day I withdraw the money as cash. That's 15 or 20 years for me.

So, isn't the real gamble whether the gains on that investment exceed $40 over the lifetime of my ownership of said shares?

If you have to pay back the $1000 after one year, then it is like leverage that is costing you 4% per year. You should be looking at 1 year returns, not 20.

v8rx7guy

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Re: Use credit card convenience checks to invest?
« Reply #10 on: September 18, 2019, 11:47:41 AM »
You can safely assume a return greater than 4% over a long period of time, but you cannot assume you will win over the time span of a year.  It's a gamble.

But wouldn't the long-term return be the more salient of the two since I'd be holding the shares for a period of several years? Here's how it seems to me: For a hypothetical $1K investment that costs me $40, the gains on the shares that I buy in 2019 would need to exceed $40 between the day I buy them and the day I withdraw the money as cash. That's 15 or 20 years for me.

So, isn't the real gamble whether the gains on that investment exceed $40 over the lifetime of my ownership of said shares?

If you have to pay back the $1000 after one year, then it is like leverage that is costing you 4% per year. You should be looking at 1 year returns, not 20.

This is a much more concise response to a really drawn out post I was about to make to clarify my statement... glad you posted.

talltexan

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Re: Use credit card convenience checks to invest?
« Reply #11 on: September 18, 2019, 11:50:26 AM »
The credit card issuer has a lot more freedom to call the loan. And the circumstances in which they call that loan are the circumstances in which you'll be behind on your basis.

There's a famous bogleheads discussion thread about a man who did what you're proposing on a grand scale ($200,000 via credit card access checks and margin lending). I make myself read through this thread once a year as a way to keep my risk tolerance in check.

https://www.bogleheads.org/forum/viewtopic.php?t=5934

ChpBstrd

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Re: Use credit card convenience checks to invest?
« Reply #12 on: September 18, 2019, 12:52:29 PM »
Go big or go home! Interactive Brokersí margin rate is currently 3.63% up to $25,000 and it drops from there. Itís tempting to buy some REITs and MLPs at those rates, but the downside of using margin instead of the credit card debt is the risk (or safety net depending upon oneís perspective) of margin calls and the variable rate.

https://www.interactivebrokers.com/en/index.php?f=18069

Yes, that Boggleheads thread is a legend. Funny how so much finance writing eventually turns from investment analysis to philosophy and self-reflection.

El_Viajero

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Re: Use credit card convenience checks to invest?
« Reply #13 on: September 18, 2019, 12:54:09 PM »
If you have to pay back the $1000 after one year, then it is like leverage that is costing you 4% per year. You should be looking at 1 year returns, not 20.

LOL. Yeah. Duh. I was forgetting that major detail! Seems obvious now.

Edit: FWIW, I've decided NOT to do this "buy equities with access checks" thing. It was just an idea. Thanks, everyone, for talking me through this one.
« Last Edit: September 18, 2019, 12:56:36 PM by El_Viajero »

solon

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Re: Use credit card convenience checks to invest?
« Reply #14 on: September 18, 2019, 01:13:46 PM »
But I learned about stoozing, so it wasn't a wasted thread! Definitely going to start stoozing.