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.
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:
- Credit Card Arbitrage I – What is it? at Million Dollar Journey
- Our Credit Card Balances: $223,270 at My Dollar Plan
- How To Make Money From 0% APR Balance Transfers (Index) at My Money Blog
Pinyo Bhulipongsanon is the owner of Moolanomy Personal Finance and a Realtor® licensed in Virginia and Maryland. Over the past 20 years, Pinyo has enjoyed a diverse career as an investor, entrepreneur, business executive, educator, financial literacy author, and Realtor®.