What would you do in this case...


T

The Henchman

Hoping the moderators let this in and if they don't hopefully they tell me
why...

Came up with an interesting investing scheme today. My credit card company
sent me three blank cheques that I'm allowed to use for whatever reason for
an introductory interest rate of 2.9% (I assume that's 2.9499999% :). It is
a cash advance that I can pay another card or myself or whatever purpose I
want. The introductory rate is good until July 15th 2007 then according to
the fine print it goes back to 19.97% (I assume retroactive on the full
amount I borrowed and not the remaining balance.)

Now Last year I invested $5500 into my RRSP's (Canada's 401k type plan) In
Canada we are allowed to carry forward past year's worth of unused
contribution limits. I can still contribute another $28000 because of
unused cap room space from the past. That $5500 is the first contributions
towards retirement goals, so my retirement portfolio is now $5500.

My retirement horizon is in thirty years and I "plan" on having 25 years
worth of income from my investment so that's 55 years.

That $5500 contribution last year lowered my marginal tax rate from 31% to
24%. I cannot go lower than 24% in Ontario Canada I think. However for the
2006 tax year I can still contribute up to $28000 if I wish and the Cut-off
date is Feb 28 2007 says the government of Canada.

If I take another $5000 cash advance from the credit card company at their
2.9% rate and put it into my RRSP and go for a tax refund in April and pay
the card back within 6 to 9 weeks is this smart or is this just gambling?

I'm already in-line for a $1400 tax refund without borrowing. With an
additional $5000 contribution I would say maybe I get another $1000 to $1200
tax refund bringing my expected tax refund around $2500. I wouldn't swear
by or on it because it's government and tax but it's a good and sound and
reasonable exception I should boost my tax refund to $2500 give or take a
$100. I calculated the cost of the loan at 2.9% to be $70 as long as it's
paid by July 15th. It's a credit card so revolving interest!!! Maybe I'm
wrong on the $70.00

I have the ability to pay off $5000 before July 15th and if I use my income
tax refund then I should pay off that $5000 cash advance by end of April.
In March I get 3 paycheques (I get paid biweekly) but since it's March it's
past the Canadian cut-off for personal retirement contributions for the
previous tax year. So a nice little bonus pay in March to go along with
what I think is a bonus tax refund.

Is this gambling? Or is it sound plan, or is it just monkeying around? Is
it silly or smart, provided I am discipline to have it paid off by July.
Iit doesn't have to be $5000 I borrow fromt he credit card. It could be
$2500 or $1000 or $7000. My tax bracket will be 24% and can't be lowered
anymore.

It gives me a chance to begin diversying, I have a 30 year plan (55 years if
you include living after date of retirement). Starting early is better?
Any other way to get a low cost loan?

Others facts: I have NO debt, I rent and I have 10 months living expenses
saved in cash.

$5000 is not alot but It doubles my retirement portfolio to $10500. Now
regardless If I borrow or not to get the refund I still contribute monthly
to this RRSP $250 a month.

So what do wise long term investment people do with my scheme? Do they take
advantage or find better things to think about....
 
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J

joetaxpayer

The said:
Hoping the moderators let this in and if they don't hopefully they tell me
why...

Came up with an interesting investing scheme today. My credit card company
sent me three blank cheques that I'm allowed to use for whatever reason for
an introductory interest rate of 2.9% (I assume that's 2.9499999% :). It is
a cash advance that I can pay another card or myself or whatever purpose I
want. The introductory rate is good until July 15th 2007 then according to
the fine print it goes back to 19.97% (I assume retroactive on the full
amount I borrowed and not the remaining balance.)
What you are suggesting is a variation of the 'free loan' offers that
many credit card companies are pushing. Borrowing at 2.9 and investing
at 5% (I trust that your rates are near ours) will net you a couple
percent which may be worth the effort, maybe not.
Putting in your retirement account and paying it back later doesn't
bother me, given the rest of your profile (i.e. no debt, and good savings)
JOE
 
J

John A. Weeks III

The Henchman said:
If I take another $5000 cash advance from the credit card company at their
2.9% rate and put it into my RRSP and go for a tax refund in April and pay
the card back within 6 to 9 weeks is this smart or is this just gambling?
Go for it. Consider the worst case. If you cannot pay it back in
6 to 9 weeks, you probably have the teaser rate for at least 6 to 9
months, so you still have a lot of time to raise $5K. The other worst
case is if a payment is missed, or the credit card company loses or
sits on a payment, and you go up to the max rate of 32% or so. That
would be like $130 a month in interest. That would be bad. Do you
have any other teaser rates or home equity checks, or an emergency
fund to cover this in case of this happening? This is a good reason
not to do it. But if you have some time period that expires, the
credit card checks are one way to buy some time.

-john-
 
P

PeterL

The said:
Hoping the moderators let this in and if they don't hopefully they tell me
why...

Came up with an interesting investing scheme today. My credit card company
sent me three blank cheques that I'm allowed to use for whatever reason for
an introductory interest rate of 2.9% (I assume that's 2.9499999% :). It is
a cash advance that I can pay another card or myself or whatever purpose I
want. The introductory rate is good until July 15th 2007 then according to
the fine print it goes back to 19.97% (I assume retroactive on the full
amount I borrowed and not the remaining balance.)

Now Last year I invested $5500 into my RRSP's (Canada's 401k type plan) In
Canada we are allowed to carry forward past year's worth of unused
contribution limits. I can still contribute another $28000 because of
unused cap room space from the past. That $5500 is the first contributions
towards retirement goals, so my retirement portfolio is now $5500.

My retirement horizon is in thirty years and I "plan" on having 25 years
worth of income from my investment so that's 55 years.

That $5500 contribution last year lowered my marginal tax rate from 31% to
24%. I cannot go lower than 24% in Ontario Canada I think. However for the
2006 tax year I can still contribute up to $28000 if I wish and the Cut-off
date is Feb 28 2007 says the government of Canada.

If I take another $5000 cash advance from the credit card company at their
2.9% rate and put it into my RRSP and go for a tax refund in April and pay
the card back within 6 to 9 weeks is this smart or is this just gambling?

I'm already in-line for a $1400 tax refund without borrowing. With an
additional $5000 contribution I would say maybe I get another $1000 to $1200
tax refund bringing my expected tax refund around $2500. I wouldn't swear
by or on it because it's government and tax but it's a good and sound and
reasonable exception I should boost my tax refund to $2500 give or take a
$100. I calculated the cost of the loan at 2.9% to be $70 as long as it's
paid by July 15th. It's a credit card so revolving interest!!! Maybe I'm
wrong on the $70.00

I have the ability to pay off $5000 before July 15th and if I use my income
tax refund then I should pay off that $5000 cash advance by end of April.
In March I get 3 paycheques (I get paid biweekly) but since it's March it's
past the Canadian cut-off for personal retirement contributions for the
previous tax year. So a nice little bonus pay in March to go along with
what I think is a bonus tax refund.

Is this gambling? Or is it sound plan, or is it just monkeying around? Is
it silly or smart, provided I am discipline to have it paid off by July.
Iit doesn't have to be $5000 I borrow fromt he credit card. It could be
$2500 or $1000 or $7000. My tax bracket will be 24% and can't be lowered
anymore.

It gives me a chance to begin diversying, I have a 30 year plan (55 years if
you include living after date of retirement). Starting early is better?
Any other way to get a low cost loan?

Others facts: I have NO debt, I rent and I have 10 months living expenses
saved in cash.

$5000 is not alot but It doubles my retirement portfolio to $10500. Now
regardless If I borrow or not to get the refund I still contribute monthly
to this RRSP $250 a month.

So what do wise long term investment people do with my scheme? Do they take
advantage or find better things to think about....
they make their money from people who have no self discipline. since
you plan on paying them back, go for it.
 
J

Joshua Bilsky

Go for it. Consider the worst case. If you cannot pay it back in
6 to 9 weeks, you probably have the teaser rate for at least 6 to 9
months, so you still have a lot of time to raise $5K. The other worst
case is if a payment is missed, or the credit card company loses or
sits on a payment, and you go up to the max rate of 32% or so. That
would be like $130 a month in interest. That would be bad. Do you
have any other teaser rates or home equity checks, or an emergency
fund to cover this in case of this happening? This is a good reason
not to do it. But if you have some time period that expires, the
credit card checks are one way to buy some time.

-john-
I suppose this is why CC companies charge a higher fee on cash advances
vs balance transfers and purchases. If they ran a 12 mo promo rate of
0%, it would seem to me like a no brainer to take a cash advance and
invest it elsewhere such as a 5%+ CD or MMA for the 12 mo, make the
minium monthly payment, and pay off the balance before the 12 month
period expired. I notice that most CC companies want at least 3% for
cash advances. Would it be safe to assume this helps them avoid people
using their "free money" for the sole purposes of investing?

-JB
 
B

bowgus

The said:
Hoping the moderators let this in and if they don't hopefully they tell me
why...

Came up with an interesting investing scheme today. My credit card company
sent me three blank cheques that I'm allowed to use for whatever reason for
an introductory interest rate of 2.9% (I assume that's 2.9499999% :). It is
a cash advance that I can pay another card or myself or whatever purpose I
want. The introductory rate is good until July 15th 2007 then according to
the fine print it goes back to 19.97% (I assume retroactive on the full
amount I borrowed and not the remaining balance.)
<snip>

FWIW ... the old buyer beware gimmic where all payments go towards the
e.g. let's say $5K first. Or, take the $5K, and then without thinking
put say a big frikken TV at $1200 on the card. Before the end of the
month you think you pay off the TV at $1200, but then the statement
comes in. $1200 towards the $5K and a little interest charge at 19.97%
on the $1200 TV ... each month, until that original $5K is paid off.
 
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T

The Henchman

bowgus said:
<snip>

FWIW ... the old buyer beware gimmic where all payments go towards the
e.g. let's say $5K first. Or, take the $5K, and then without thinking
put say a big frikken TV at $1200 on the card. Before the end of the
month you think you pay off the TV at $1200, but then the statement
comes in. $1200 towards the $5K and a little interest charge at 19.97%
on the $1200 TV ... each month, until that original $5K is paid off.
My understanding is payments get applied to interest first, the interest
that is generated by the most recent purchases then backwards towards
earlier purchases. Cash advances trigger interest from the day you borrow.
Purchases get a grace period, usually 14 to 28 days. the interest is applied
retroactively. Payments are then applied to purchases or cash advances
secondly, with the most recently being dealt with first. Am I wrong on
that?

Personally My rule is for every $100 I would like to spend I require 24
hours cool-down. So for a $1200 TV my own rule is to take 12 days to ponder
this purchase. Not everyone is that disciplined so I see your point about
the buyer beware.. However I do put everyday purchases on a credit card. I
keep a backup credit card so maybe I can use that card for the everyday
purchases and use the primary one for the low interest rate cash advance
and don't use it again until the advance is paid off.

Is this what you are saying?


======================================= MODERATOR'S COMMENT:
Please trim the post to which you are responding. "Trim" means that except for a FEW lines to add context, the previous post is deleted.
 
R

Rich Carreiro

The Henchman said:
retroactively. Payments are then applied to purchases or cash advances
secondly, with the most recently being dealt with first. Am I wrong on
that?
Yes.

Payments are applied first to the balance subject to the lowest
interest rate until that is paid off. Only then will payments
be applied to the balance at higher rates.

So let's say you took a $5000 cash advance under the 2.9% promotion
and then you purchase $2000 of stuff.

If you make a payment of $1000, it'll be applied to the cash advance,
leaving you with $4000 being charged 2.9% and the full $2000 being
charged 18% (or whatever).

You'll have to pay off the entire $5000 promotion balance before
your payments will start reducing the debt that's costing
you an 18% rate.
 
S

sparksals

The said:
Hoping the moderators let this in and if they don't hopefully they tell me
why...

Came up with an interesting investing scheme today. My credit card company
sent me three blank cheques that I'm allowed to use for whatever reason for
an introductory interest rate of 2.9% (I assume that's 2.9499999% :). It is
a cash advance that I can pay another card or myself or whatever purpose I
want. The introductory rate is good until July 15th 2007 then according to
the fine print it goes back to 19.97% (I assume retroactive on the full
amount I borrowed and not the remaining balance.)
I'm from Canada, but now live in the US. To me, you're making it far
more complicated. Why don't you take advantage of the low or zero
percent interest RRSP loans offered by every bank and financial
institution across the country? The interest would be tax deductible
because you are borrowing for investment purposes.

You can't predict the future. What if you have a financial ER where
you can't pay off the c/c?

If I were you, I'd stick with simplicity and get the RRSP loan. I
don't believe that taking money on a c/c would be considered a valid
method of borrowing for investment and would not qualify for the
interest deduction for said investment.
 
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T

The Henchman

I'm from Canada, but now live in the US. To me, you're making it far
more complicated. Why don't you take advantage of the low or zero
percent interest RRSP loans offered by every bank and financial
institution across the country? The interest would be tax deductible
because you are borrowing for investment purposes.
Interest is NOT tax deductible if the loan is for the purpose of RRSP
contributions. That loophole got closed ages ago.

Secondly most banks only offer RRSP loans if you open the RRSP account with
the same bank offering the loan and staying with their own investments. MY
RRSP account is currently with a full service planner that may offer RRSP
loans but at prime rate plus .25%.

Most RRSP loan products I looked are offered at the Bank's Prime lending
rate, which is currently 6% for just about every Canadian institution.
Maybe an Insurance company will offer a bit lower. However since the Credit
Card is offering 2.9 that beats any rate I have seen from a lending
institution.
You can't predict the future. What if you have a financial ER where
you can't pay off the c/c?
I keep 9 months emergency pay in high interest and 30 day GIC accounts . I
have the money set aside for the big just in case scenarios.
If I were you, I'd stick with simplicity and get the RRSP loan.
I can't find a low interest rate RRSP loan or am I not looking hard enough?
And again the interest on loans for the purpose of investing into RRSP's do
not qualify as a tax deduction.

That said I'm glad you raised a couple of key points.......
 

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