Making Money With Credit Card Arbitrage

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:

41 thoughts on “Making Money With Credit Card Arbitrage”

  1. 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.

  2. 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…

  3. 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.


  4. 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…

  5. 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.

  6. 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!

  7. 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.

  8. 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.

  9. 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.

  10. 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.

  11. @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.

  12. “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. 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.

  14. @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.

  15. @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.

  16. “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.

  17. @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).

  18. @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.

  19. @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”.

  20. 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.

  21. @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.

  22. 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.

  23. 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.

  24. Since I’ve been running a credit card arbitrage strategy north of $200k for the last 5 years, of course you know which side I’m going to take. We made about $12k last year from arbitrage and it takes very little time. The key is being organized. I also understand it is not for everyone.

  25. This seems like a good way to make some extra money and it would feel great to be getting a little something back from the credit card companies!

  26. I’m changing my attitude about the “risk factor” in the whole scheme of making money. It does make sense. 12k is a pretty good side income for staying the course and being organized. I just know I’m not that organized. But I’m also not “stupid” In a month our credit cards will be paid in full for the first time in a lot of years. God willing and the creek don’t rise they’ll stay that way.

  27. I scrolled down to the bottom to leave a comment that was going to say something like, “credit card arbitrage certainly works for some, but it’s just not for me.” On my way to the comment box, however, I took special note of My Dollar Plan’s comment about making 12k last year. I’ll have to run the numbers to see what we could do, but I would definitely do this for 12k. MDP, how much are you borrowing to generate 12k in income???

  28. @ Dough Roller: Last year our balances averaged about $225,000. We were able to generate $12,000 since interest rates were much higher than they are now (especially with the 6% offer from FNBO).

    We keep our utilization to about 20% so that our scores aren’t affected much. We dropped it to about $170,000 now so that we can refinance our house, but we’ll ramp it back up as soon as the documents are signed.

    @ Pinyo: Hmmm… never thought of being an arbitrage coach… I like it!

  29. This is really interesting. I’ve never even heard of it, but going into debt to invest just sounds… risky, to say the least. Maybe I’ll try it out with $50 and see how it goes 😉 LOL – it would make a very interesting addition to my blog challenges so far.

  30. Interesting, I’ve never considered credit card arbitrage before, but granted, I’m a poor student so I doubt I’d be able to borrow anything about £2000.

    Having said that, I believe that if you manage to get $100,000 out, perhaps your best strategy is to NOT stick it into an online savings account, surely there are other accounts that pay a higher return on average? Fixed deposits, ISAs, etc.

    However, for the sake of argument, I think there are a few things that one has to consider when making this sort of investment.

    1. Will the Feds lower the interest rate and effectively reducing the amount of money you earn as a result?
    2. What if the credit card company inadvertently change their policy?
    3. Given the current economy and credit crunch, even for consumers, how easy will it be to obtain finance?

  31. I had some friends in medical school who did something similar with their loans. They were on full-ride scholarship, but still took out the maximum loans available for each year of the 4 year program. (That leads to a pretty hefty sum – well over $100,000.) They then placed the loan money into a higher interest account until they graduated from medical school, at which time they were able to pay off the loans with no interest. This was because they had the insurance that it was deferred during school, and they kept the accrued interest from the account. I am not sure about the legality or ethics of this, but the thread on credit card arbitrage reminded me of it.

  32. You mention something about paying ALL the back interest if you miss a payment.

    I never miss payments, but I seriously doubt if that’s true.

    You’d might lose the deal and owe 1 months interest assuming you pay it all off then and there.

  33. @Shanti – I am not comfortable doing it either. If you aren’t, I wouldn’t recommend it.

    @utkt – Online savings is an example and it was very popular amoung arbitrager because it used to pay 5-6% and very easy to move money around.

    1. That is what happing recently.
    2. That’s one of the risk, but usually as a result of you messing up somewhere — i.e., late payment on one of your card.
    3. Apparently,not that hard. CC industry is very competitive and lucrative. They are giving them away like candy here in the U.S.

    @Jerry – These guys are clever, but they’re also hurting everyone else.

    @Jack – I am looking at my statement now. I have a Home Depot 0% interest no payment offer for 12 months (to pay for my new carpet). There’s a field called “accrued finance charge” with a note saying “to avoid paying accrued finance charges you must pay off your promotion balance by the expiration date shown.” If I miss paying even 1 cent on the expiration date, I could be paying hundreds of dollars in accrued finance charges.

  34. I would think the Home Depot offer is not the same as normal CC balance transfer deals. It’s an in house financing deal.

    Never heard of back dating interest on a bt deal.

  35. I have been doing this for about 3 years or so, making about $3K in the process. Deals I have gotten range from “no fee, 0% interest for 12 months” (very sweet) to “$75 max fee, 0% interest” on a 25K credit limit account (still good) to “3% fee, 0% interest” (worst deal I would consider taking, since 3% is relatively large return today).

    Obviously this strategy is not one the banks expect many people to adopt, since it would cost them a boatload. But I’m happy to take their money 😉

  36. For those that said you’d rather save instead of risking it, what’s point of saving money if inflation of the US dollar is at an all time high? You are already risking by saving. I’m not saying go spend needlessly but educate yourselves enough to reap great rewards. Risk is only risk if not calculated properly 🙂

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