Credit Card Arbitrage - Introduction
As one of my goals for this year (a post I swear I’ll write someday), I decided to give credit card arbitrage a try. A couple months ago, I had no idea what that term even meant, but thanks to posts at Blueprint for Financial Prosperity, Five Cent Nickel, and most importantly the tutorial at My Money Blog, I decided to go for it.
Simply put, credit card arbitrage is borrowing money from a credit card company using a 0% balance transfer offer, putting that money into a high yield savings account for the length of the 0% promotion, then paying off the original loan and pocketing the interest. Taking out $10,000 with 0% interest for a year and putting that into an account earning 4.5% APY, you’ll earn (before taxes) about $450. Now, there are a TON of issues to consider, and this scheme is NOT FOR EVERYBODY.
First, for the length of the 0% promotion, you must still pay your minimum payments every month. If you miss a payment or are late, you can kiss the 0% APR goodbye and you’ll start paying around a 30% APR. It’s VERY important to stay on top of payments. It’s also important to pay off the entire balance before the end of your promotional terms. Any interest you gain could quickly get eaten up with finance charges at a regular interest rate. Also, the other major drawback is your credit score. Opening up the cards, plus maxing out your limits will put a strain on your credit score that could potentially impact any loans in the near future. In my case, I’m not looking to take out any new loans in the next 12-18 months, so it’s not an issue.
That said, if you’re on top of your finances and don’t mind a dent in your credit score, there’s a pretty easy way to earn some free money. I’ve applied for a couple cards and have requested some balance transfers already, so please stay tuned as I’ll give you all the details along the way.
Posted on Tuesday, February 27, 2007 @ 9:56 pm by BudgetFreak
Filed Under: Banking , Credit Cards , Goals , Savings
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on 28 Feb 2007 at 5:11 am 1.jim said …
BudgetFreak - The whole 0% arbitrage process is painless and definitely worth a try, good intro on the subject, if you need a list of cards without transfer fees (I didn’t want to drop a link here) I’ve compiled one if you want to shoot me an email.
on 28 Feb 2007 at 6:47 am 2.BudgetFreak said …
Thanks for the comment Jim. I actually used your list when I was shopping around for cards, so thanks for putting that together. I’m planning a whole series of 0% balance transfer posts, so the application and card selection process is coming up.
on 19 Mar 2007 at 1:20 pm 3.Opened a Washington Mutual Savings Account » Budget Freak said …
[...] a $1 minimum to open and no monthly fees. I decided to apply for an account last week to hold my 0% balance transfer money. Even though I already had a Washington Mutual Checking account, I still needed to apply for a new [...]
on 03 Apr 2007 at 1:01 pm 4.Two Month-iversary » Budget Freak said …
[...] Started earning interest borrowing $16,800 from credit card companies for FREE, taking advantage of 0% balance transfers [...]
on 08 Apr 2007 at 5:41 pm 5.Robert said …
So Budget Freak, If I understand the process correctly, you do a balance transfer Payment to your Washington Mutual savings or checking account from your Citi card, even though the balance transfer is not being used to pay off a debt, and then you can earn interest on the money transfered to the W.Mutual account at the going rate for savings account deposits?
So W.Mutual is paying around 4.5% on savings, or Cert. Of Deposit?
This looks interesting. I did not know that you could do a balance transfer payment directly to a bank account. Interesting indeed, if I understand this correctly.
-Robert
on 11 Apr 2007 at 6:47 am 6.BudgetFreak said …
Hi Robert-
Citi credit cards are the only ones that let you request a balance transfer in the form of a check to yourself. And the WaMu account is a regular savings account. You just have to open a free checking account online, and you’ll get the 5% rate. Check out this post.
on 18 Apr 2007 at 5:34 am 7.0% Balance Transfer Update » Budget Freak said …
[...] experiment with earning free money from 0% balance transfers is going just fine. I got my first interest payout a couple weeks ago, $26 for about a week and a [...]
on 22 May 2007 at 7:02 am 8.Credit Card Arbitrage Update » Budget Freak said …
[...] you may know, I’ve been making money taking advantage of 0% balance transfers offered by many credit cards. So far, I’ve made over $90, and I’ll be getting another [...]
on 28 Apr 2008 at 2:58 pm 9.Credit Card Arbitrage: Clever, but not without risks — Dirt Simple said …
[...] surfing through a number of other personal finance blogs, I stumbled across this concept of credit card arbitrage. It just goes to show you how un-creative I am when it comes to investing, because this technique [...]
on 25 Jun 2008 at 6:44 am 10.A Near Disaster with 0% Balance Transfers » Budget Freak said …
[...] like to nominate myself for ‘Idiot of the Year.’ After explaining all the pitfalls of 0% balance transfers, how dangerous it can be, and how careful you need to track your due dates… I miss a payment. [...]