synaesthesia

Bank of America recently started a program called Keep The Change. You need a BoA checking and savings account and a regular BoA (non-rewards, non-branded) debit/check card. The way it works is that any purchase you make is rounded up to the next whole dollar, and the change is deposited into your BoA savings account. For the first three months of the promotion, BoA matches the deposit at 100%, and afterwards at 5%. There is a $250/year cap on the matching earnings, and they are only transferred to your account after you have been enrolled for a year, whereas the change transfers from your own account occur on a daily basis.

Maximizing profit

You maximize your profit when the cents are both minimized and non-zero. You should thus elect to use your check card with purchases where you can choose the final purchase price, such as at a metered dispenser such as a gas pump, or at a restaurant where you leave a tip of your choice, or at a fast food establishment where you can add on cheese or extra sour cream for 10 or 20 cents, or through eBay/PayPal when you can enter your own shipping price for an item. This way, you can ensure that you always receive the maximum match with each purchase by ensuring that the total is at or above, and as close as possible to, a whole dollar amount plus one cent. If you wanted to live on the edge, you could buy only a few gallons of gas at a time — not a bad strategy considering that gas is currently $3 or more per gallon. You could also try asking for cash back when you use your check card at grocery stores, but I’m not sure if non-whole-dollar amounts are acceptable to them.

If you have a utility bill such as cable, telephone, mobile, or DSL which accepts credit/debit transactions, you can try paying the bill in small increments. Remember to make sure it is debited as a debit or Visa purchase, not a EFT. Ensure that each payment is for a different amount so the multiple transactions don’t look like a mistake or fraud.

Examples:

• When paying a phone bill “now”, AT&T allows up to 4 payment sources to be made at a time, as long as the total payment is at least $5. Pay 1.01, 1.02, 1.03, 2.01, for a total of 5.07, and repeat.
• Sprint PCS allows up to 2 credit card payments in 14 days to be made. Pay 1.01 and 1.02.
• A local DSL provider allows as many payments as you wish to be made until the bill is paid. Pay 1.01, 1.02, 1.03, 1.04, 1.05, 1.06 ….

You can pay a charity fund which has a Paypal account in small increments. Paypal eats the fees if it is a special fund. There was a Hurricane Katrina fund which has since been closed. Note that this is not the same as paying a charity which happens to take Paypal, in that case the charity is eating the fees, bad move.

If you have a Paypal merchant or Google merchant account, you can pay that account from your personal account in small increments. You do lose some money to fees in this case, so be careful to watch the fees they are charging. Again, make sure it is debited as a debit/Visa not EFT. Also be aware that if you have a Paypal balance, Paypal will debit it first before going to your check card. So make sure you have transferred all of your money out of Paypal first.

You can also pay Ebay seller fees in small increments, but only if you copy the link that redirects you to Paypal and open up all of the transactions you want to make BEFORE completing the first one. The reason is that Paypal will not let you start more Ebay transactions after a few have been made, but it will not halt those which have already been started.

Since you can earn a maximum of $250 per year, your best strategy is to make 252-253 purchases in the first three months if possible. This is about 21 purchases per week, or three purchases per day. This strategy is defeated if you waste money on purchases that you would not otherwise have made, so be careful!

Rewards credit cards

If you have rewards credit cards, then there is further strategy to be realized.

To game this system requires that you first realize that the maximum profit per transaction is $0.99 during the first three months, and $0.05 thereafter. We assume that you are maximizing this profit below, otherwise the calculations are quite complex. I am also assuming that you pay no interest on the credit card purchases due to a grace period.

First three months

In the first three months, a $19.01 purchase that you make $0.99 on would net approximately a 5% return. If you have a credit card that offers 5% cash back on the same purchase, at this point the return is equivalent. At or below $20.00, you should use your check card, but above $20.00, you should use your 5% cash back credit card. A $1.01 purchase would net almost 100% cash back with the check card!

If you only have a credit card that offers 1% cash back or less for that purchase, then you should use the check card when the purchase price is below $100, and the credit card when the purchase price is above $100. If the return is 0.5%, then $200 becomes the critical price for the first three months.

So, for the first three months, if you have constructed a purchase with a maximum change matching:

• If purchase price is above $20, use a 5% cash back credit card if you have it, otherwise use the check card
• If purchase price is above $100, use a 1% cash back credit card if you have it, otherwise use the check card
• If purchase price is above $200, use a rewards credit card if you have it, otherwise use the check card

After the promotional period

After the first three months, the maximum $0.99 return nets you only $0.05. The critical price compared to a 5% cash back credit card is then $1.00, compared to a 1% cash back card is then $5.00, and to a 0.5%-1% rewards card is between $5.00 and $10.00. Thus, after the first three months, you should always use a rewards credit card instead of the BoA debit card, UNLESS the purchase price is less than $10.00.

For specific strategy, after the first three months, if you have constructed a purchase with a maximum change matching:

• If purchase price is above $1, use a 5% cash back credit card if you have it, otherwise use the check card
• If purchase price is above $5, use a 1% cash back credit card if you have it, otherwise use the check card
• If purchase price is above $10, use a rewards credit card if you have it, otherwise use the check card

After the first three months, since you are only making a maximum of a nickel per purchase, you might reconsider whether it is worth the effort to put any thought into the game, since you can earn far more money for example by being wiser with your spending habits.

Addendum

Some people have reported that BOA will decline multiple 1 cent transactions issued in a row. Automated gas pumps will also blacklist you if you buy penny amounts too often. So spend at least a whole dollar in each transaction. You may get a hold on your account if you use a credit card for small amounts too often. You can help yourself avoid getting stuck with a hold by making sure automated machine transactions, such as those at gas pumps and at the USPS lobby kiosk, are processed as a debit transaction and not a credit transaction.

More ideas on maximizing returns here

Another article

Credit card arbitrage

This might be fun to try sometime if you have the cash on hand to cover a potential misfire. This requires two credit cards issued by different banks.

On one card, take a no-fee cash advance up to your credit limit, then immediately take a balance transfer to the other card (0-6.99% interest rates are common) to avoid the exorbitant cash advance interest rates. The bank covering the balance transfer has no idea nor interest in what the source of the balance was, which is why it is important for the cards to be issued from two different banks. Some companies will allow you to transfer a “balance” that doesn’t exist, giving you a negative balance on another card, which you can then sometimes get a check for the negative amount — an even better deal because cash advance complications are not involved.

Invest the cash advance in short term mutual funds, a money market account, or a CD that matures just before the introductory period expires. If you don’t have the cash to cover a loss, then you need to use a short term CD or a high yield savings account instead! The investment must be at a higher interest rate than the balance transfer’s introductory rate for this scheme to work. When the introductory balance transfer period is about to expire, use the money you invested or your cash on hand, and pay off the balance of the credit card. When you get another credit card offer in the mail, pounce and repeat.

If you don’t get another offer in the mail, use the cash you previously had on hand (and if you were smart, also invested in a money market or high-yield savings account) to pay off the balance. If you have enough credit cards that your debt to credit limit ratio is still reasonable, then wait until your introductory period is about two months from expiry and start applying for new 0% balance transfer cards one by one. The reason you want to wait is that 0% transfers are usually only introductory offers, so waiting means you will be able to time the arrival of the new card correctly. The reason you want to apply for them one by one is because multiple credit card applications will ding your score — and if you open a new credit card account that you don’t use, all it is doing is dinging your credit because your credit limit to income ratio is now higher. Because of this, you should close any new accounts that were opened “accidentally”. Don’t close old accounts that are in good standing.

A better description of this scheme can be found at http://www.mymoneyblog.com/how-to-make-money-from-0-apr-balance-transfers/

Balance transfers

Using credit cards strategically involves paying off in full every month any credit card balance that includes transactions which are assigned an interest rate higher than the rate of return on an investment. Credit card companies will always apply your payment to your lowest-interest-rate portions of your balance first. So don’t take a balance transfer to a card that has a higher interest rate simply on the basis of a low introductory balance transfer rate, and then start using that card for purchases. Your payment principal will go towards your balance transfer and the purchase principal will gradually replace it at the higher interest rate. Use introductory offers to relieve a high balance on another card and force yourself to schedule a payback plan for the balance, but if you must make new purchases, make them on a different card.

Don’t be afraid to ask

… for a lower interest rate, or special balance transfer offers. The worst they can say is no. Frequently, they say yes. Even a few percent reduction saves you real money for nothing more than a few minutes on the phone. It helps to keep your accounts in good standing (no defaults, and breathing room on the balance) so that the companies don’t feel that they might soon have something to gain (i.e. a juicy default) if they do say no. In other words, use this as a periodic bargain hunting strategy, don’t put yourself in the position where you have to use it as a last resort.

Strategize with Rewards

Different cards offer different rewards. Some are in the form of points that can be redeemed for gift certificates and merchandise, others are in the form of cash back. However, many rewards are tied to specific categories of purchases, while others can be applied to any purchase.

For example, a Discover card may offer 5% cash back on gas, and 1% on other purchases. However, a Discover card is not accepted everywhere. A Bank of America Worldpoints card offers “points” in return for purchases of any sort, that can later be redeemed for cash (at about a 0.5-1% rate depending on how many are redeemed at once), or for gift certificates at almost 1%. Cash back is obviously more useful than gift certificates, and with cash back instead of redeeming points for cash, you have faster access to the reward and a better return.

So in this case, you would think of your Discover card as your “default” card to be used wherever it is accepted, and always at a gas pump because the reward is so compelling, and your Bank of America card as your “fallback” card – it is accepted at more places, but the rewards are less useful. So plan your purchases to benefit most from your rewards, and remember to redeem any rewards before they expire (expiration of rewards is usually listed in your agreement).

Rewards make the most sense when you keep your account at a zero balance. Rewards exist because the card companies want you to use your card more, in the hopes you’ll carry a balance and negate the rewards they pay you. You win if you can collect all the rewards through your purchases (plus enjoy the convenience and security of a credit card), but still pay off your balance in full every month. If you spend more on your credit cards than you can pay off in full every month, thus carrying a balance and accruing interest, no rewards program will convert the loss into a gain.

One way to take advantage of rewards is to pay your utility bills with a credit card when possible (on those that give you rewards for services, not only purchases). You’ll build up rewards because of having to pay your utilities on a regular basis. Watch out, though. There is a reason credit card companies occasionally offer special incentives such as airline companion tickets when you pay a utility bill with the credit card. They know that this is a pretty good way to get you “hooked” and into the cycle of paying interest.

One way to minimize your risk in taking advantage of credit card rewards is to transfer the amount of the credit card purchase from your bank account into a savings account at the same bank for holding. Then you know when it comes time to pay the bill, you have it covered in full — no guessing.

A great site to figure out how to deal with all the credit card rewards is CreditCardTuneup.com. You input your periodic spending in all the various purchase categories that credit card vendors offer rewards for, and the site calculates the best cards for you to carry to maximize the rewards.

Store credit cards

Store credit cards are usually a bad idea because of the heinous interest rates and the space they take up on your credit report. However, they are a decent way to get a credit history started or to repair a bad one. You need to watch out for the “0% interest for 6 months” type of deals, because while you pay no interest for 6 months, if 6 months passes and there is still 1 cent left of the balance, you will be backcharged 6 months worth of interest. Of course, the payment plan is scheduled such that you will have a balance left after 6 months, so it is up to you to make sure that you have a zero balance at the time the introductory period expires.

My SO has a nice scheme to easily make money off using store cards. When you must make a big purchase such as a home improvement or appliance purchase, first of all have the cash on hand to cover the purchase, but then make the purchase at a store that offers a store card and put the purchase on the store card. Use the store card to pay for the purchase, and then use your cash to purchase a CD or some other security that matures such that you can have the money in time to pay off the balance just before the introductory period goes away. This way, you are guaranteed two things: one, that you will in fact have the money to cover paying off the store card, because it is bonded and out of your hands, and that you are also making money on that money while you wait out the 0% rate period. Nifty!

Keeping idle accounts open

You may have several credit cards that you carry a zero balance on, but keep the cards around as tools to use when an opportunity arises. Unfortunately, credit card companies have been swifter at closing accounts with zero balances, or even carrying balances but with zero activity, in recent years. One creative way to keep your accounts open is to schedule automatic political or charitable contributions on each account that you wish to keep active, then schedule automatic payments or e-bills from your bank account to automatically pay the balance off at each statement.

Maybe the best part about this scheme is that charitable contributions are federally tax-deductible, and several states such as Oklahoma allow a state deduction for political contributions up to a certain amount. So with this scheme you are keeping your card accounts open by making tax deductible micro-contributions on a regular basis – sounds like a win to me.

Grace periods

By far the best document I have found to describe grace periods is published by American Express. Most credit cards have what is called a typical grace period. You are charged interest on new purchases made during that month, unless you paid the previous month’s bill in full. I have to experiment and find out what this means.

It could mean that if you pay the balance in full by the due date, no interest is charged on new purchases made in the meantime is dropped. This is how people I have talked to typically understand a grace period.

However, it could also mean that you must have a zero balance at the end of some billing cycle before a grace period is applied. That means you must include in your payment a sufficient amount to cover all purchases that will have been made up to the next billing date. This in itself would be incredibly inconvenient. What would make it even more inconvenient is if you have any unexpected activity such as periodic billing from a vendor, that pops in and screws up your calculation.

In this case, you would also need to account for, and pay before the statement date, any new purchases AND any automated billing activity. Otherwise, you will be permanently stuck in a no-grace-period cycle, because even though you are paying off the previous month’s balance every month, you continue to carry a balance forward with the new activity, and so the grace period does not apply, because at no point did you have a zero statement balance.

I’m running an experiment on one of my credit cards right now, and I’ll post the results in a few months.

Case Study: Buying a car

Figure out how much you want to spend, then have that amount of cash in hand before you buy. If you don’t have the cash but you have the income to cover a new car, you can do the following. First, attempt a personal/signature loan for that amount, with no lien, from your bank or credit union. No lien means you pay a higher interest rate, but you are free to do whatever you wish with the car. If you can’t get a no-lien loan, then try to get a loan with a lien. Failing that, if you have two credit cards from two different banks, where one has a no- or low-fee cash advance and the other has a balance transfer offer, then take a cash advance from the one card and immediately transfer the balance to the other card. You then have cash in hand and pay off the loan at the balance transfer APR.

Once you have cash in hand, you can then buy from a private seller, or you can play the financing game at a business. Businesses love to sell financing, because it makes a lot of money for them when people make the minimum monthly payments. So you can pretend to not have the money, and negotiate a lower price for the car with the understanding that you will be financing it. Since you have the cash on hand, you can immediately pay the loan off the next month.

An important catch here is to ensure that the any prepayment penalties are sufficiently low or non-existent, such that it is still a good deal for you to take the financing discount instead of paying straight up cash…