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Sunday, January 24, 2010

The Ping-Pong effect: the other way to manage your credit cards balance transfer

Wonder what I mean by the “ping-pong effect”? It’s sort of a credit card debt advice that I never read ANYWHERE.

Before getting in the deep of the ping-pong effect theory, I want to overview my debt situation. Paying debts had never really become one of my top priorities as I prefer to take my money and invest. But I try to keep a decent balance between the two. I have in debt what I can afford. I do not want to have a too tight budget. The best, of course, would be to have to debts at all. But did you know that having debts can actually help the economy? The trick is not to have too much debt and to have debt that you can afford. And also, the interest rate shouldn’t be too high. So there are important points to consider before opening a credit line, credit card or a loan. For now, my rule is simple, I do not want to get much more debts than what I have right now.

Here’s my debt management situation:

Line of credit #1: 4 831.44$ at 8%: yearly interest = 386.52$
Line of credit #2: 4 899.59$ at 3.5%: yearly interest = 171.49$
CIBC Visa: 3 086.91 at 3.9%: yearly interest = 120.39$
Student loan debt: 8 593.74 at 4.75%: yearly interest = 408.21$
Total of debts: 21 411.68$
Total of yearly interest: 1 086.60$

Having 21 411.68$ in debts could be seen enormous, but it’s truly not, and I am going to explain why I keep investing instead of paying debts. 8%, 3.5%, 3.9% and 4.75% are low interest rates. My next investment of tomorrow morning will bring my yearly dividend income to 3 154.83$. Remember? lol.

Let’s calculate:
my yearly dividend income – my yearly interest rate coming form current debts:
3 154.83$ - 1 086.60$ = 2 068.23$.
Now we are in business.

How am I going to benefit from CIBC Visa offer?

My CIBC Visa limit is of 5 000$. I already have 3 089.91$ on it. Which mean that I only have around 1 400$ available. 1 400$ at 3.9% interest for 8 months… How about that?

I am planning to make a 1 400$ payment on my TD credit line, which is at 8%. How am I going to make the payment? Credit card balance transfer won’t work in this case because I am planning to make a payment of 1 400$ on my credit line. This is exactly where the ping-pong effect comes in action.

I am going to make a cash advance of 1 400$ on my RBC Visa. Immediately after, I am going to pay RBC Visa using a promotional cheque coming from CIBC Visa. I won’t own anything to RBC Visa, except a 1.50$ for the cash advance (which I am going to pay right away too). With 1 400$ in my pocket, I will visit a TD branch and deposit 1 400$ on my TD credit line. And voilà.

This payment will reduce my TD credit line at 3 431.44$, for a yearly interest rate of 274.52$. The complete scheme:

Line of credit #1: 3 431.44$$ at 8%: yearly interest = 274.52$
Line of credit #2: 4 899.59$ at 3.5%: yearly interest = 171.49$
CIBC Visa: 4486.91 at 3.9%: yearly interest = 175$
Student loan debt: 8 593.74 at 4.75%: yearly interest = 408.21$
Total of debts: 21 411.68$
Total of yearly interest: 1 029.22$

1 086.60$ - 1 029.22$ = 57.38$ in savings!
Conclusion: lower interest rates = more money in your pocket!

I calculate the amount on a yearly interest rate. Of course, the CIBC Visa 3.9% interest rate is for 8 months only, not one year. But I got special offer for credit card on a regular basis, so I don’t worry too much about what’s going to happen in 8 months from now. As you can see, credit cards balance transfer is part of my debt management plan. The 3.9% interest rate coming from CIBC Visa might be one of the best interest rate for credit cards balance transfer on the market.

This is the reason why I like to have multiple credit cards. If you are willing to have multiple credit cards because you don’t have any yet and you want to do like me lol, be careful; do not open new credit cards at the same time: it will badly affect your credit. I own most of my credit card since 2004 or around that year. Most important part to remain a good level of credit score: make the minimum payment required on time. On that purpose, I recommend to apply for a pre-authorize debit for the minimum require each month. That way, you are being protected if you forget to make a payment. This is being credit smart.


Ron said...

Hi, Sunny,
You should check out the Capital One MasterCard with a 2 year rate guarantee of 5.9%. After the 2 years, the rate is prime + 3.75% which is not bad for a credit card.

Have a good week!

Sunny said...

Thanks for the tip. It's a good credit card. Desjardins offer a credit card with a rate of about 8%, but there's a fee of around 50$ to get the card.. Seem like credit card are like other product, we need to shop around to th best one. I prefer a credit card at the lowest interest rate possible than having rewards.


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