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GCC: Every once in awhile, somebody does something incredibly amazing. And when they do, I always ask myself, “How did they do that?!” and “Could I also do this amazing thing?”
In this case, that amazing thing is borrowing $250,000 at 0% interest while saving $30k in taxes, $6k+ in interest, and earning $2k+ in bonuses.
Read on to see how one Go Curry Cracker reader did just that.
Not long ago, Jeremy wrote a blog post detailing his thoughts on the current state of inflation and some strategies for dealing with the situation. In that post, he noted that he has been taking on a bit of low interest debt. He’s doing this because holding debt at an interest rate much lower than the current rate of inflation is generally a winning proposition (i.e., free money). And one of the ways that he is doing this is by applying for credit cards with 0% APR teaser rates that generally last for 1-2 years. After the term expires, the rate increases to the normal rate of, um, a LOT more than 0%, so you want to be sure to pay off the balance in a timely manner.
When I read this post, I couldn’t resist commenting that like Jeremy, my wife and I had recently purchased a house. A new build on which we finalized the contract last summer and closed earlier this year, paying cash with house money. I also noted that to lower the 2022 tax burden, we took out over $200K in 0% credit cards to cover this year’s living and move-in expenses, the latter being substantial because before leaving our old place, we sold/gave away almost everything we owned.
Honestly, I didn’t think that much about my comment or that leveraging credit cards to this extent was noteworthy. But a few readers responded with questions and even Jeremy asked me to write a guest post asking for more details about what I did and why. What follows is that post.
Before I get started, let me give you a little background so you can understand where I’m coming from. I’m 60 years old and stopped working about three years ago. I always tell people that I never really retired. I just stopped looking for work. I’ll get back to it someday soon…right?
My wife, who’s about the same age, does a little part-time work to help with a family member’s business, but she’s been mostly retired since 2013. Both of us enjoyed our respective careers quite a bit, but we relish the free time and ability to travel even more. We’re always going somewhere!
Though owning a house is what we’ve always done (for better or for worse), we decided to rent for the four years that we recently spent in Oregon. Mostly we did this to remain flexible because we weren’t sure how long we would be there. While we enjoyed our time in the Pacific Northwest (wonderful coastal towns, proximity to family and crazy good beer being the top three reasons in my mind), we knew going in that Oregon was likely a temporary stop over.
So, in the summer of 2021, we decided almost spur of the moment to sell/give away almost everything we owned, cash in some market gains, buy a house and move to the Sunshine State, the land of Disney, beaches and…hurricanes.
Now, much has been written about the “pay cash vs. get a mortgage” choice and I have absolutely nothing new to add to that spirited debate. I’ll only say that in our case, we needed to move quick, and nothing is quicker than a cash offer. Also, at the time I knew very little about qualifying for a mortgage without a job or the interest rates that I could expect. I didn’t have the time (or desire) to research the topic for a couple months, so I took the path of least resistance (a path I often travel) and went with a cash offer.
The problem was that even though my wife and I could pay for the house with a combination of cash already in a taxable account and withdrawals from a traditional IRA, doing so would almost max out the 24% Federal tax bracket (about $340K for a MFJ return) and leave precious little to fund the customization and furniture/houseware buying that we wanted to do, vacations that we had planned long before deciding to purchase a home and just the usual day-to-day living expenses.
Our initial thought was to just grin and deal with a marginal 32% or (more likely) a 35% Federal tax rate for this year. But there were two issues even with that.
First, I also had to pay at least some state taxes on 2022 income because we didn’t leave our higher tax state until February. So, the higher our 2022 AGI went up, the more state tax we’d have to pay.
Second, I planned to pay almost all our 2022 Federal and State tax burden in 2023 since the safe harbor rule allowed us to pay very little estimated taxes in 2022. (Our 2021 Federal and State tax bills were very low.)
But now it’s like dominos falling. Paying a bigger 2022 tax bill in 2023 would require more 2023 income than we’d normally need. So, not only would the 2022 tax bill be affected, but the 2023 tax liability would be affected as well. Bummer.
Credit Card Debt to The Rescue. Really?
Back in the summer of 2021, it was hard to estimate exactly how much extra cash we needed for 2022 to fund the move, but we figured, worse case, between $200K and $250K ought to do it. At the same time, I started taking note of those almost weekly credit card offers we received in the mail promising 0% APR on new purchases or balance transfers. As noted earlier, the duration of the teaser rate typically ranged from 12 to 18 months (15 months seemed the most common), after which the rate would revert to something substantially higher.
The more I thought about it, this seemed like a potential solution because I only needed the extra money to get us through 2022. I could easily pay off $200K or so in January of 2023 and still have room enough under the 24% tax bracket to fund our 2023 living expenses, which are projected to return to normal or even a bit less than normal since we’re no longer going to be paying $3K in rent every month.
And not only did 0% APR sound good, but most of these new card offers came with a signing bonus of a couple hundred bucks or so (no problem meeting the minimum spend requirements!) and they were mostly cash back rewards cards with rebates ranging from 1-5%. Once the dust settles in 2023, we could easily be looking at $5K or so of credit card rewards. I’ll take it.
Still, there was a problem. Applying for a single card with a typical credit limit of maybe ten or twenty thousand wasn’t going to make much of a dent in the amount of cash needed. I needed a lot of cards, at least ten, probably more.
The Application Journey
Before starting the application process, both my wife and I had high credit scores (800+). As such, we never got rejected when signing up for a new card. We also hadn’t applied for any new cards in several years. So, we started the application journey in a good spot.
We also had a lot of cards already because over time we had collected numerous signing bonus. Though we no longer use most of our cards and pay off the balances in full for the few cards we do use, the total amount of credit was over $250K. So basically, I was looking to double our amount of existing credit.
I also suspected that once I started applying for cards, our credit scores would surely take a hit and result in lower credit limits granted or even outright rejections. I didn’t want that to happen.
So, I needed a list of 0% APR cards fast. I couldn’t wait for offers to be delivered by the USPS.
Turns out, finding 0% APR card offers is incredibly simple (who knew?). Just click on the 0% APR credit cards link on Go Curry Cracker! (Go ahead, we’ll wait. ☺)
Or if you prefer, there are numerous sites to choose from and most of the card issuers are household names in the financial services industry. Heck, even the ads on the search results are helpful. For example, my search just now included an ad for a Wells Fargo card offering 0% APR for 21 months. Not bad…maybe I should apply! ☺
Once armed with a list of cards with promising terms (at least 15 months of 0% APR with cash back and signing bonuses a nice-to-have) my wife and I started applying like crazy. Two Player Mode!
Within a span of about one week, we had applied for a total of 12 cards. We stopped when we finally started getting rejections due to too many recent credit inquiries. At this point, we had over $200K in 0% APR credit, so that was probably enough anyway. However, just to sweeten the pot, in January of this year, we received a couple of 0% APR offers for two credit cards that we have had for a long time. We figured, why not?
So, in the end, we amassed fourteen 0% APR cards with a total credit limit of just over $250K. Also, in total the cards offered $2000 in signing bonuses with a small minimum spend. And all but two of the new cards were “cash back” cards with various reward levels ranging from 1-5%. It really felt like we’d been paid several thousand dollars in exchange for taking out a substantial loan at 0% interest!
In case you’re curious about the specific cards we acquired, here’s the list, along with an overview of the terms. Instead of just picking cards at random, we tried to pick ones that either had compelling spending perks or were offered by financial institutions with which we might consider a deeper relationship in the future. In other words, we tried to pick cards that were compelling even after the 0% APR expired.
Note: credit card offers vary, the following is what was available when we applied.
- US Bank Cash+(R) Visa Signature(R) card – 0% APR for 20 months. No cash back or signing bonus.
- Citi Custom Cash – 0% APR for 15 months. $200 signing bonus with $750 spend. 1% cash back plus 5% cash back on largest single spending category (e.g., groceries).
- Chase Freedom Flex – 0% APR for 15 months. $250 signing bonus with $500 spend. Cash back ranging from 1%, 3% (restaurant/drug stores) and 5% Chase travel portal and 5% on special categories.
- Wells Fargo Active Cash – 0% APR for 15 months. $200 signing bonus with $1000 spend. 2% cash back.
- Bank of America – 0% APR for 15 months. $200 signing bonus with $1000 spend. 1.5% cash back.
- Sallie Mae Evolve – 0% APR for 15 months. $200 signing bonus with $1000 spend. 1.5% cash back plus 2% on two highest categories.
- FNBO – 0% APR for 15 months. 1% cash back. (No signing bonus).
- American Express Blue Cash Preferred(R) Card – 0% APR for 12 months. (These are the two legacy cards that offered us 0% APR earlier this year.)
The credit limits granted ranged from $9K all the way up to $30K. Amusingly, for cards that both my wife and I applied for, she typically got the better limit by a few hundred bucks.
Once the cards started arriving in the mail, we shifted almost all our spending to the new cards. Given that we normally pay for things with credit cards, this wasn’t a big change. (Typically, two hundred bucks from the ATM will last us the better part of a year.) The only challenge was keeping up with which card to use to get the minimum spend within the time limit (usually around three months).
But I’m not going to lie. Creating online accounts for the various cards, setting up monthly auto pay and then closely monitoring everything for a few months is a hassle. None of this is a big deal for one card. But do it for fourteen cards and you’ll see what I mean.
So roughly eight months after the first application, here’s my take on how it’s going so far.
Most importantly, 0% APR really works! I know this sounds dumb but in truth I fully expected that I would have to call at least a few of the card companies to remind them of the 0% APR offer when they “mistakenly” charged us interest. But nope, I didn’t have to. Not once. Every single card has so far adhered to the terms of the deal, including signing bonus and cash back criteria. So that’s a nice surprise, at least to me!
Also, while setting up fourteen new accounts was time-consuming, once that is done things mostly switch to autopilot. The only on-going challenge is to monitor the balances to ensure that we don’t go over an individual card’s spending limit. We monitor our card charges closely anyway, so this isn’t a huge challenge for us.
The Not So Good
First, after an entire adult life of religiously paying off credit card balances every month, it’s frankly a little weird to be running such high balances on cards. (We’re up to about $180K now.) Yeah, I know it’s “free money” and I know that we’ll easily pay it all off come January 2023. But it’s hard to totally shake a lifetime of financial behavior.
And as expected, our respective credit scores took a body blow. Once all the credit inquiries hit our credit record and the outstanding balances started moving up, both our scores plummeted. I didn’t watch it all that closely, but my score generally went into the “poor” range while my wife’s score fared a bit better.
But did it matter? As near as I can tell, not very much. Due to my low score, I had to pay an extra $80 deposit with the power company, but I’ll get that back in two years assuming I pay all the bills on time. On the other hand, the water and cable companies didn’t need a security deposit at all.
Our home and auto insurance premiums weren’t penalized due to our low scores. (I explicitly asked just to make sure.) It probably helps that we’ve been with our current insurer for decades now, so there’s a long history of us paying the premiums on time and having very few claims.
For sure, I don’t expect that now is a great time for us to obtain a mortgage or buy a car on credit. But since we’re not interested in doing either, it’s not a problem. Given the right situation, credit scores really don’t matter that much.
The Not Good
But not everything went according to plan. For example, the credit limit on one of our legacy cards went down by over $10K when we used it for the first time. (By this time, our credit scores had gone south.) Another card’s limit was cut by $20K when a previous large charge was refunded months later due to a cruise cancellation. In both cases, I can only speculate that the bank’s processing system automatically ran a credit check due to the “unusual” transactions, didn’t like what it saw and automatically lowered the limit. In both cases, the lowered limit happened within minutes, so I doubt an actual person was involved. But neither limit restriction was that big of a deal because we had plenty of headroom across our 0% APR portfolio.
The biggest problem encountered is that a few of the vendors we’ve been using for customizing our new home don’t accept credit cards, or if they do, they tack on a processing fee of three percent or so. In some cases, we chose to just pay the transaction fee but for most we just wrote a check. Since we had some cash in the bank even after the home purchase, there shouldn’t be a problem with getting to the end of 2022 without realizing additional taxable income. Still, it’ll be a bit tighter than I would have liked.
So, we’re all moved into the new house and though we’re not totally done with the major move-in expenses, it is rapidly winding down. (Thank goodness!)
Oddly, we’re still getting balance transfer offers in the mail, though many of them are starting to feel a bit “predatory”. Many of them advertise “rates as low as %0” so that you can consolidate your debts but if you look at the fine print, you’ll see that the rate you get is tied to your credit score and that the actual rate may be as high as 35%! Yow!
Still, just this week I received a “legitimate” 0% APR for twelve months offer from Capital One. For a 2% transaction fee, I could transfer the balance to my bank account. Since I’m a little worried about having enough cash in taxable accounts to last until 2023, I couldn’t resist. So, add another 10K to the amount of money borrowed at 0% APR.
Was It Worth It?
It’s a good question. And while the downsides so far have been minimal, they’re not totally absent. So, it’s helpful to spend a moment thinking about how much we’ve saved by going nuts with credit cards.
First, a side note to answer a question that Jeremy had when he was reviewing a draft of this post. Once we decided last summer to purchase the house, I sold equity in our retirement accounts to roughly cover our extra need for cash. As a rule, I try to keep about 3-5 years of living expenses in cash or short-term corporate bonds (VUSB and VCSH). Since buying the house was obviously going to suck up a lot of available cash, I simply sold enough equity in 2021 to compensate for the extra cash needs of 2022 and beyond. So, it is not the case that I will have to reduce our equity holdings to pay off the credit card balances because I’ve already done it. The cash has been sitting in an IRA since last summer.
So anyway, 2022 isn’t over, but in round numbers, if we had not gone the 0% APR credit card route, we would have had to incur at least 200K of extra income above the 24% tax bracket (which tops out at about 340K MFJ). Doing this would have taken us past the 32% rate to a 35% marginal rate (which kicks in at about $432K MFJ).
For simplicity, ballpark the effective Federal tax rate at around 33% on that extra 200k of income plus another 1% or so for state tax because we didn’t leave Oregon until February. So, figure we’d need to pay in Federal and State tax combined an amount about 34% of 200K, which is 68K in extra tax for 2022 beyond what we’ll already pay.
Next year, we have options on how to fund expenses. While I won’t decide on the specifics until later this year, one idea is to fund next year with a combination of IRA distributions taxed at a marginal 12% rate and the rest by selling stocks in a taxable brokerage account and immediately rebuying them with the cash currently sitting in the IRA, effectively moving the stocks from a taxable account into an IRA.
The marginal rate on the capital gains should be no more 18.8% (15% plus 3.8% NIIT). So, worse case, that extra 200K will incur about 38K in tax. So, the savings work out to something like 68K – 38K = 30K. And don’t forget the 5K or so of credit card signing bonuses and cash back rewards. Granted, this is all a rough estimate because I’m not yet sure of next year’s expenses (depends largely on how crazy we go with traveling), but even being pessimistic, the savings are significant.
I’m also ignoring any interest and dividends that we’ve earned by keeping money invested for an extra year or so. It’s minimal, but it’s not nothing. I’m also ignoring the fact that we might take advantage of additional 0% APR offers should they come our way in 2023. ☺
But mostly, it’s been educational and fun (in a money nerd sort of way). It’s kind of exciting to borrow money at 0% interest, even if it’s only for a year or so. I’ll be the first to admit that this “hack” isn’t available to everybody and is probably only genuinely useful in a small number of situations. That is, an immediate need exists for a large amount of cash but withdrawing a large sum from a traditional IRA will blow through the lower tax brackets for a given year. It’s a way to transfer a tax liability into the following year.
If you anticipate a need for extra cash repeatedly or for longer periods of time, bite the bullet and get a HELOC or even do a cash out refi. Rates certainly aren’t as low as they were a year ago, but they’re not THAT high. And in the event rates go back down, you can always refi.
And for goodness sakes, don’t do what we did if there’s even the slightest doubt in your ability to pay off the debt within the prescribed 0% APR timeframe. Clearly, the card issuers are betting that at least some of the people signing up for these offers will fail to pay off the balances when the teaser rate expires. If you’re not able to pay off the debt promptly, pain and tears will be the result. But if you’re reading Go Curry Cracker, I suspect that you know this already.
If you agree that is all pretty amazing, you can see what 0% offers are available here: 0% APR credit cards
What do you think? Have you gone crazy with 0% credit card offers?
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