UnThreaded | Threaded | Whole Thread (3) | Ignore Thread Prev Thread | Prev | Next | Next Thread
Author: tmorrow Three stars, 500 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 308881  
Subject: Credit Cards vs. Mortgage as leveraging Date: 7/15/1997 1:48 AM
Post New | Post Reply | Reply Later | Create Poll Report this Post | Recommend it!
Recommendations: 0
Disclaimer: This sounds like a bad idea to me; I am just putting it out for discussion to get people to look at things critically. It definitely sounds too much like a MAKE.MONEY.FAST scheme for me to try it, but I would like to hear other people (especially homeowners) comment on why it wouldn't work, and what makes it different from the leveraged investment in a home.

Has anyone tried using the introductory rate 5.9% credit cards to leverage purchases of investments that would return more than 5.9%? People buy a house on a 5% down payment, effectively leveraging 1:20. They pay about 9% interest, which winds up being about 6% after taxe deduction, the same rate as these credit card teaser rates.

So that brings me to thinking: What about leveraging stocks or mutual funds using financing from the introductory rates of credit cards (which is the cheapest way to borrow money). Assuming the offer is for 8 months of 5.9% financing, you would have to take a month or so to transfer your balance into the card and a month or so to transfer the card out to the next card in the line, so each card would really be good for only 6 months or so. So the work that you would need to do would be to apply for 2, or maybe 3 of the introductory offers that you get in the mail per year. You would invest the $10,000 credit line in a fund (perhaps an index fund) which can be expected to earn at least 11% as its long term average. 11% minus 6% is 5% per year of gain, or $500 per year. This is the amount that you gain for risking that $10,000 principal and doing the work to kite the balance to teaser credit cards. You would have to have other cash available so that you could pay off the credit card if the stock declined below its starting value. Lets say you kept an equivalent amount, $10,000 of your own money, invested in the same fund, on the assumption that the likelihood of the fund plunging below 50% of its starting value before you get out is too remote to think about. Then you are effectively leveraged in a 1:2 ratio.

Now I am not advocating this kind of leveraged investing, because it is rather risky. But lets do a reality check: is being leveraged 1:2 in the stock market any more risky than being leveraged 1:20 in the real estate market? I would say no. Yet many people buy homes with just a little money down, unaware of how risky this is. It probably is true that an index fund price is more volatile than the price of a home, but it would have to be ten times more volatile to justify the 1:20 leverage that people do "safely" with homes. I don't think that the difference in volatility is that great. Oh, and remember that even though the stock is more volatile, the potential reward (in terms of percentage gain per year minus the 6% loan interest) is much greater.

Here are the obvious caveats that I see with the credit-card leveraging scheme: (answered so I can save you the time of bringing them up)

You have to read the fine print. You need to make sure that there aren't balance transfer fees, or that if there are that they are very low. You have to make sure the teaser rate applies to balance transfers. You have to do the work of applying to the credit card companies, making a minimum payment each month, and keeping vigilance to make sure you move your money on to the next card before the introductory period is over. Frankly this is the main aspect would keep me from doing this In Real Life; I don't want to lose sleep over worrying about whether there was something in the small print that I missed.

You have to have the credit cards offers coming in. This doesn't seem to be a problem; I have been getting 5.9% offers regularly for about 5 years now, and they don't seem to be stopping any time soon. I don't think it is unreasonable to think that you could keep this up over 10 years or so. Note that index funds haven't historically lost money over any ten year period, which is less risk than housing markets, where many homes have lost value over a ten year period.

You have to have a $10,000 debt somewhere already to transfer in. This might require paying a Cash Advance fee to your current credit card at one time to get the scheme started. Or put off $10,000 worth of normal credit card purchases until you are ready to begin, then do them all in one month and make sure that balance is transferred by the end of the month grace period.

This will lower your available credit for other purposes. If I were denied a mortgage or auto loan based on having too much unsecured credit in use, I could cash out the fund and credit card, apply for the loan, then move onto the next credit card offer and back into the fund once the loan was secured. But I suspect that this would actually help credit over the long term, by showing that you are capable of repaying large revolving debts. (Heck, the credit card companies would probably see the huge revolving debt you carry responsibly and salivate over the prospect of having you paying the interest to them)

The main problem in comparing buying a house versus the credit-card-leveraging scenario is that you can live in a house, but not in the "house of cards" of the credit-card-leverage scheme. But that doesn't address the relative riskiness of the house purchase.



Post New | Post Reply | Reply Later | Create Poll Report this Post | Recommend it!
Print the post  
UnThreaded | Threaded | Whole Thread (3) | Ignore Thread Prev Thread | Prev | Next | Next Thread

Announcements

TMF Credit Center
The Motley Fool Credit Center arms you with real tools and simple messages, that will help you in every credit situation.
Foolanthropy 2014!
By working with young, first-time moms, Nurse-Family Partnership is able to truly change lives – for generations to come.
When Life Gives You Lemons
We all have had hardships and made poor decisions. The important thing is how we respond and grow. Read the story of a Fool who started from nothing, and looks to gain everything.
Post of the Day:
Macro Economics

Economic Implications of Cuba
What was Your Dumbest Investment?
Share it with us -- and learn from others' stories of flubs.
Community Home
Speak Your Mind, Start Your Blog, Rate Your Stocks

Community Team Fools - who are those TMF's?
Contact Us
Contact Customer Service and other Fool departments here.
Work for Fools?
Winner of the Washingtonian great places to work, and "#1 Media Company to Work For" (BusinessInsider 2011)! Have access to all of TMF's online and email products for FREE, and be paid for your contributions to TMF! Click the link and start your Fool career.
Advertisement