My series of articles on How To Make “Free” Money From 0% APR Balance Transfers has been very popular and many readers have also jumped in. Despite the risks, I’m still happily earning some money from the credit card companies for a change, and haven’t missed any payments. From the beginning, people have asked me to make a spreadsheet or calculator in order to estimate the potential profit from such endeavors. I initially decided against doing so because there are lots of different variables at stake that make an exact prediction close to impossible. However, I think it may still be useful to obtain some more realistic numbers.
Without further ado, I present to you the…
Inputs and Definitions
- Arbitraged Interest Rate (APY) – Where are you putting the money you’re borrowing for free? This is the interest rate of the investment vehicle (savings account, CD, Treasury bond) you are using, or perhaps the interest rate of the existing loan (car, home equity, student) that you are paying down.
- Starting Balance (dollars) – How much money are you transferring?
- Monthly Minimum Payment (%) – Usually you must still make a monthly minimum payment on the outstanding balance during the 0% period, which will decrease your profit potential slightly. This is usually around 2%, but may vary between 1.5% and 4%.
- The balance transfer is for 12 months at 0% APR, with no balance transfer fee. You can find my list of the best 0% APR offers here with low or no balance transfer fees here.
- The interest is assumed to compound monthly, which allows me to convert from APY to APR, and then to a periodic rate. Compounding frequency is a variable here, but doesn’t change the numbers too much.
- I am ignoring the time required to actually convert the balance transfer into cash earning interest. Sometimes this can take up to a few weeks, sometimes it is much faster. Instead of guessing, I just leave it be.
- I am also ignoring things like grace periods and the timing of statement cycles and due dates, which can actually increase the time that your borrowed money is earning interest, and thus your profit.
- If you are earning interest in a taxable bank account, you will likely owe income tax on that interest at your marginal rate. This is not accounted for in the calculator, but is a simple calculation.
(If you’re confused about what I am talking about, please refer to the tutorial mentioned above.)
Example Profit Calculation
Let’s say you obtain $15,000 and place it in a bank account paying 5.25% APY, with a 2% monthly payment. Using our assumptions, the 5.25% APY is equivalent to 5.13% APR, or earning 0.4273% of the balance each month.
Beginning of Month #1: You have $15,000 in the bank. Total balance left on credit card: $15,000. Nothing is due yet.
End of Month #1: You earn $64.10 in interest, but also need to pay back $300 (2% of $15,000) out of your bank balance for the minimum payment.
Beginning of Month #2: Total in bank:$14,764.10. Total balance left on credit card: $14,700.
End of Month #2: You earn $63.09 in interest, but also need to pay back $294 (2% of 14,700).
This continues for 12 months, as shown below:
At the end of the 12th month, your bank balance is $12,477.87, and you still owe $11,770.75 on the card. You pay it off completely, leaving you with the resulting estimated profit of $707.12.
Play around with the calculator. Some people actually have over $100,000 out at once, earning them thousands of dollars a year. My credit limits aren’t quite that high…. yet!