Making Money With Credit Card Arbitrage

This article is not meant to convince you to try credit card arbitrage. Rather, it’s meant to explain what credit card arbitrage is and start a discussion about it. Ultimately, I would like to hear your thought on credit card arbitrage as a money making strategy.

Credit Cards

Photo by Classyshot via Flickr

First, we start off with a little background information.

What Is Credit Card Arbitrage?

Credit Card Arbitrage is a strategy where the arbitrager borrows money from credit cards that offers 0% APR for a certain amount of time (usually 6 or 18 months). Then use the money borrowed from these credit cards and put it in a bank with high interest rates.

Before the balances are due, the arbitrager withdraw the money from the bank and repay the loan. More experienced arbitrager may even open new credit cards to pay the debt and keep the money in the bank.

How Much Can You Earn From Credit Card Arbitrage?

The answer depends on many variables such as:

  • How much did you pay in fees throughout the process?
  • How much interest is your money earning?
  • How long do you have before you have to repay the credit card debt?

Let’s look at a theoretical example:

With my excellent credit score, I should be able to get enough 0% APR credit cards to borrow $100,000. Next, I would deposit the money into a high yield savings account, which pays about 1% on average (this used to work much better when these accounts were yielding 5%). Let the money sits in the bank for 12 months, and I’ll ended up with $101,000. After I repay all my credit card balances, I ended up with $1,000. That’s not bad for very little effort on my part.

Potential Issues With Credit Card Arbitrage

Now, let’s look at some of the negatives.

  • Credit Card Debt — No matter how you justify it…it is debt
  • Discipline not to spend the money — This depends on the individual and it’s a big IF. If you can’t keep the money in the bank, you’ll end up with a lot of credit card debt in the end.
  • Potential to pay a lot of interest — If you miss any payment, you could end up paying a lot of interest. Most of these offers will retroactively bill you for all interest accrue from the beginning. And any card could raise their interest without notice, not just the one you’re late on.
  • Potential to pay a lot of fees — You’ll have to read the fine prints carefully. Sometimes, credit card companies attach conditions with these 0% APR offers.
  • Damages your credit score — You are definitely toying with your credit score here. If you are not planning any major purchases like a house or a car, then you’re fine; otherwise, your credit score will take a hit.

So, here’s the question

Have you tried credit card arbitrage? And what do you think about this money making strategy?

What others are saying about credit card arbitrage:

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About the Author

By , on Apr 11, 2008
Pinyo
Pinyo is the owner of Moolanomy Personal Finance. He is a licensed Realtor specializing in residential homes in the Northern Virginia area. Over the past 20 years, Pinyo has enjoyed a diverse career as an investor, entrepreneur, business executive, educator, and financial literacy author.

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Leave Your Comment (41 Comments)

  1. i did this about a year and a half ago when savings interest rates were about 4.5%. over 5 months, i earned about $300 in interest on $23,000. overall, i would say it was worth it. my credit rating did take a hit temporarily, but now my credit score is back to being pristine. now that rates aren’t as attractive it’d really cut into how much you can make, but if you’re willing to put in a little effort to manage the process and can afford to have your credit score drop for a short period, i’d say go for it.

  2. jay says:

    I don’t agree with your earnings calculations. You haven’t really addressed these issues, but I think you should:
    -You have to make monthly payments, and thus have to subtract that amount from the total you’ve arbitraged/banked and thus interest earnings will rapidly diminish since cc payments are calculated as a function of total owed; usually 2 to 2.5%.
    – Interest rates should really be calculated at after tax rates (e.g., if tax rate 30%, 3% interest rate is really 2.1%)
    – Your credit history WILL take a major ding if you max out your cards -a major problem-especially now when lower FICOs are causing banks to lower or freeze credit lines (esp. HELOCs).

    For most of us, the net gain would be minimal.

  3. Pinyo says:

    @J — Really, I am a little obsessive about paying my 2 credit cards now — checking weekly even after I scheduled the payment in advance. I can see myself going loopy if we talk about $100,000.

    On the other hand, the stock market could drop 10% in a month and it doesn’t bother me at all.

  4. J says:

    I guess the bottom line is, I don’t consider the possibility of my “screwing up” as a “risk”.

    Not saying I’m above such mistakes … I just don’t categorize them as a risk.

    “Risks” are things I can’t control (i.e. the stock market, natural disasters, etc).

    I’d like to think I can control my screw ups if I take the time to learn to.

  5. J says:

    @Mark Krusen

    “Taking a risk and being stupid are not one in the same.”

    Exactly my point, Mark.
    Most of the “negatives” outlined in the original posts are results of doing something you shouldn’t – not risk.

    One can (and should!) lose money with CCAs if you don’t pay the bank back it’s money on time, but you won’t lose it because of some disregarded or unknown “risk”.

  6. J says:

    @Anne

    The risk you outline are so low they are irrelevant.

    I’m sure you have money right now that is in greater risk of loss than what you’d lose in a CCA play if one of your “risks” were to occur with your CCA money.

  7. J says:

    @Pinyo

    “Risk is in the eyes of the beholder. We all have different risk tolerance.”

    Of course.

    However, all but one of the “negatives”, or “risks”, you outlined in your original post, are problems only if you do something incorrectly, not because the activity itself is “risky”.

    Using your liberal definition of what is risk, it’s risky having a checking account because, hey, you might write a check for more than you have in your account, and lose money in the form of a big fee.

    But, that’s not “risk” … that’s a penalty for doing something … uh… something you shouldn’t (I wanna say “stupid” here, but I won’t).

  8. Mark Krusen says:

    “j” I see your risk tolerance is actually pretty low. There is no link to a site that you Author. Taking a risk and being stupid are not one in the same. Risk can have rewards. Stupidity. Well thats just Stupid. Just my opinion.

  9. Anne says:

    @J – there are other risks.

    There’s the risk that the bank fails, and in trying to get the money back from the FDIC, you miss the 0% deadline.

    There’s a risk that you get sued and your judgment creditor goes after your bank account–which they can do, even if you have a corresponding amount of debt.

    There’s a risk that something happens on the credit card company’s end–a payment doesn’t post or gets misapplied or gets recorded as late even though it isn’t–and you have to spend hours and hours to get it sorted out. Suddenly you are working really hard for the arbitrage money.

    These risks may be remote, but they are there and should be taken into account when deciding whether to do this.

  10. Pinyo says:

    @J – Risk is in the eyes of the beholder. We all have different risk tolerance. While you think credit card arbitrage is “safe”, others may perceive that as “risky” — and there’s nothing wrong with that.

    I don’t think you’re wrong, but at the same time, there’s no need to disrespect other’s opinion by using phrases like “stupid”, “completely confused by this simple concept”, “self-inflicted”, “ignorant”, etc.

  11. J says:

    People who are calling this “risky” don’t understand what risk is.

    The only “risk” you run with credit card arbitrage is the risk that you’ll be stupid and not pay the bank it’s money back on time after collecting on the free use of their money.

    Really, when an intelligent person first reads about, most reactions are, “how can the banks let you get away with this?” And then you read comments like the ones here, and you realize most people either are completely confused by this simple concept – seeing “risk” where there is none – or they try it and cannot manage the simple organizational skill necessary to make money with minimal effort, and end up doing something stupid to create one of the self-inflicted “negative” situations outlined in the original article.

    With all the personal finance blogs and books out there, it is amazing how ignorant people can still be regarding money and simple personal discipline.

  12. J says:

    “I have so many things going on, it wouldn’t be the first time I forget to do something important.”

    Come on now, Pinyo.

    That’s the excuse people use for generally managing their personal finances poorly.

    We are ALL too busy. That’s the baseline for everyone (except those for whom personal finance is not a concern!)

    Everyone has this same “risk”.

    There, now you can’t use it as an excuse anymore.

  13. Pinyo says:

    @J — “I guess the bottom line is, I don’t consider the possibility of my ‘screwing up’ as a ‘risk’.”

    That’s fair enough. I can live with that. For me, I consider the chance that I’ll screw up as a risk. I have so many things going on, it wouldn’t be the first time I forget to do something important.

  14. Mark Krusen says:

    I agree with some of the other comments. Way to risky for me. It sounds a lot like work! What with keeping track of everything and worrying about what the credit card companies will do to change the rules.I’d rather spend my time trying to save money than make the money on a risky ponzi scheme.

  15. Anne says:

    You forgot to mention taxes. The $3000 is interest income taxable at your marginal rate. Also, as Mrs. Micah pointed out, you have to make the minimum payments on the cards each month, so you won’t have $100,000 invested for the whole year.

  16. Connie says:

    I just blogged about this because I got a pitch from Bank of America to get a new 0 percent card (for 1 year) and use it to buy a CD. I was looking for feedback from others who have tried it. Seems risky
    Here’s the link: http://blogs.creditcards.com/2.....spread.php

  17. I’ve done it once in the past and I was pretty successful at it. Of course, this was when savings rates were over 5%. Now, with the low rates, I don’t think it is worth the time and effort right now.

  18. Vered says:

    Haven’t tried it – haven’t even heard about it until I read it here, and by the way, thank you for all the great info on this blog!

    I think that to me, the potential gain wouldn’t be worth the damage to my credit score. It also seems like a lot of headache for making a relatively small amount of money.

  19. Lisa says:

    I think a well disciplined person can do it. It’s important to know all the little rules they can snag you with. You have to be smarter than they are. They’re good at playing this game, too!

  20. J says:

    Nearly all of your “negatives” are not drawbacks of credit card arbitrage (CCA), they are personal discipline problems.

    “Credit Card Debt — No matter how you justify it…it is debt”

    This is silly. You have the money to pay it off instantly if necessary, and until then you are making money on the bank’s money. This is not a negative.

    “Discipline not to spend the money”

    Personal discipline issue – not germane to CCA.

    “Potential to pay a lot of interest”

    Yes, like most things that can get you ahead in life, you need to not screw up. If you fail to return the bank’s money before the 0% period is over, you’ve screwed up. It had nothing to do with “risk”. Again, personal discipline issue.

    “Potential to pay a lot of fees”

    Yes, you do need to know what you are doing. Like most things worth doing in life. Personal discipline issue.

    “Damages your credit score”

    Finally, the one true possible drawback to doing CCA. If you are buying a house, or making another large purchase on credit soon, you’ll want to hold off on doing CCA. However, any reduction in credit score goes away in about 6 months. In fact, about a year after you’ve opened these CCA credit lines, and paid them off on time and in full, you are likely to see your credit score be even better than when you started.

    In the end, all these negatives are a non-issue anyway, because CCA’s are free money available to people who have good credit. If you are person with the personal discipline problems necessary to screw up in the manner you’ve described in the negatives, you probably don’t have good enough credit to get CCA’s anyway.

  21. brainy says:

    Been there, done that. It works if you really keep track of what you’re doing.

    I’ve found that the hardest part is finding a card company that will just mail you a check — making it essentially a cash advance at 0%. They’re out there (Citi is the easiest I’ve found), but I’ve never been able to land one with a high enough limit to make it *really* beneficial…

  22. Mrs. Micah says:

    Is there also some amount you’ve have to pay back to them each month?

    I could see doing it if I were positive I’d be organized enough. But I’m not.

  23. Four Pillars says:

    I think it would be worth doing if you are the right type of person. It’s a good way to make some extra money.

    We don’t have the opportunity for this in Canada but if we did, I would give it a shot.

    Mike

  24. Nicole says:

    This is so interesting! I’ve never heard of it before and it makes sense. I’m not sure if I have enough follow through to look into it. I had a hard time canceling People before the 4 issue trial ran out so this may be beyond me…

  25. Lynnae says:

    It’s too risky for me. Credit card companies are notorious for changing the rules on you without notice (such as rate jacking, moving due dates around, etc). One small mistake, and you’re out a lot of money.

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