Credit Card Arbitrage Not Worth the Risk

Credit card arbitrage is not a new phenomenon, but one that I never really understood until I began writing about personal finances. I started stumbling across others who have made a good amount of money using 0% balance transfer offers from credit cards to fund high-interest savings accounts. A few of these individuals have amassed as much as $200,000 in credit card debt just for this purpose. I am glad it has worked out well for them, but I don’t think I will ever have the guts to try it.

Current Economic Conditions May Threaten Arbitrage Gains

Guts aside, current market conditions are probably making credit card arbitrage a little less profitable. The Federal Reserve’s cut in interest rates has caused a significant decline in rates banks are willing to pay on deposit accounts. The rate on my own emergency fund bank account has dropped over 2 percentage points in the last few months. A few years ago 0% offers were plentiful thanks to high demand from consumers, and increased competition amongst card issuers. Today, the tightening credit market is making 0% balance transfer offers more scarce, and those that are available rarely come with no balance transfer fee.

Is It Really Worth the Trouble?

If I did apply for and receive $200,000 worth of 0% credit card balance transfer offers and deposited the money in high-yielding online savings accounts, just how much money could I make over the course of a year? About $7,000 ($200k at 3.5%). If I left it alone for three years (assuming rates don’t change) I would have about $222,000, a $22,000 gain from using the bank’s money. Of course, this doesn’t consider the minimum payments required to service the debt for my working capital, which could easily reach $2,000 a month. If I make those payments out of my checking account I am essentially spending $24,000 a year to earn $7,000 in interest. If I used the savings account to fund minimum payments I would be depleting my balance and reducing the amount of interest earned. However, if I simply saved $2,000 a month in the same savings account in just seven years I would have nearly $200,000 of my own money saved.

If You Play With Snakes Long Enough, You’ll Eventually Get Bit

Credit card arbitrage is a dangerous game. Imagine a $200,000 debt load spread across 14 or 15 credit cards, all with monthly minimum payments to track. Miss one payment by a single day and suddenly your 0% interest rate jumps to 24%, wiping away any gains you’ve made in one month’s worth of interest charges. Sure, arbitrage players have created elaborate spreadsheets to manage the various dates, but credit card companies are fickle creatures – they can change the rate at their own whim.  Arbitrage could also negatively affect your FICO score because of too many active trade lines, and because many of your balance to limit ratios will be too high.

What if you were to become extremely ill, or have an accident, or get sued? You may be forced to use some of your arbitrage savings account to finance your emergency, leaving you in a situation where you owe more than you can pay off in one fell swoop. This adds a significant amount of risk to your life that in my opinion just isn’t worth it.

K.I.S.S Principle

I am a firm believer in the K.I.S.S principleKeep It Simple, Stupid. This is especially true when it comes to finances. I would not like the idea of managing multiple credit card accounts and keeping up with minimum payment amounts, due dates, change in terms, transfer expiration dates, etc. It would also add to my insomnia to know I had $200,000 floating around in credit card debt. No, I’ll leave that interest earning opportunity on the table and continue to plug away at becoming debt free and building my own savings. The best way to build wealth and get rich? Slowly.

Comments

  1. Whoa! People actually do this?? I’m so credit-averse that the idea of intentionally going into debt–let alone 6 figures worth of debt–gives me heart palpitations. I’ll stick to my money market fund..

  2. I totally completely agree with you. Whatever works for other people, but I’m not interested. Too much time and not worth the risk. I don’t do debt :) It’s fascinating to me though.

  3. Nice post. Most of these arbitragers fail to mention the fees associated with the debt that cut into any profits (normally 3-5% of any advance). I’m in banking, and have an MBA in finance. I ran the numbers a few years back and figured my hourly wage (a good measuring stick for any kind of work) would be about $5 an hour. Not worth it at all. To compound the situation, if you make one mistake, the error could cost you enormously in higher interest, risk of loss of working capital, and risk of loss of reputation, erasing any gains you’d have had to date.

  4. For me, it is hard to believe that people actually do this. I can’t imagine taking such a financial risk. When I read this kind of thing, I can’t help but think of the things I read in “The Millionaire Next Door”. I don’t think individuals who actually have money would ever get themselves involved in such a scheme.

  5. This seems like financial suicide. Eventually those 0% offers turn into 24% interest.

    The aspect of this that I think could be useful is to take advantage of 0% balance transfers as a short term way to reduce your interest while you pay down overextended credit.

    The risk is too high for the amount of return you get. Sure who couldn’t use an extra $7000, but at the risk of $200,000 credit card debt…no thanks.

  6. you know what, this was one of the reasons i actually started blogging! i found this topic soooo interesting and couldn’t believe people were actually doing this (thought i was the only smarty! haha).

    i’m too much of a wuss right now to try it, but mad love for those getting away with it and all :)

    nice post!

  7. Doesn’t seem to be worth the time to me. I’m working to automate as many of my payments and transfers and any other financial obligations I can- I don’t see why I’d want to add the overhead of managing all of these crazy credit card offers, but I suppose if you view it as a part time job or something…it might be worth the time.

  8. a short story

    Joe borrows $200k at 0% to invest. He sets up a series of automatic withdrawals to make his credit card payments.

    One day on his way to work, someone runs a red light, crashing into him. Joe spends the next two weeks in the hospital, too exhausted and disoriented to dot his I’s and cross his T’s for his credit card payments.

    Joe regrets having ever hearing about credit card arbitrage.

    Just imagine if someone died, leaving their spouse in mourning and with a rapidly expanding credit card debt (the he or she probably doesn’t even know about, let alone understand!)

  9. I can’t imagine trying to keep up with that amount of stuff. I have trouble remembering one payment, let alone a dozen. Thankfully, one more payment to go and hopefully we won’t have to remember a credit card payment for a looooongggg time.

    PS- Thanks for your comment- I really appreciated it!!

  10. Never, never, never. I’d rather get my passive income through online writing that keeps on earning, which is what I’m doing. As soon as I pay off my remaining debt, I’ll never send another check to a credit card company — YAY!

  11. OK, there is no contrarian opinion so let me chime in. I’ve never done credit card arbitrage per se, although I effectively did it for a long period while I was carrying (paying down) debt while simultaneously having more cash (with debt at lower interest rate). I also have some friends who’ve done this and profited.

    I’m not really buying the “risks” here. In general these offers are fixed APR for life, or for some period of time, the credit card companies aren’t just going to change the terms on you. Of course, if they do, these debts are incredibly liquid and (as long as you have the cash you borrowed) you can get out of it instantaneously.

    $7,000/year is a decent amount of cash (the figure about ‘spending’ $24,000 is IMHO incorrect accounting – you would actually be SAVING $24,000 in addition to the $7,000 you earn). $7,000 is more than double the combined savings of two big frugal chestnuts: bringing lunch to work, and cutting cable. It’s probably more than most people earn blogging.

    Probably this can be done with an hour of work per week. All of the payments should be able to be automated. If nothing else, hire an inexpensive personal assistant in Hyderabad to take care of it.

    One risk which nobody mentioned is credit score damage. If you have $200,000 in credit card debt (along with 90% utilization ratio), your credit score will be in the dumps. Some people care about this. I don’t – I have no plans to take on any debt in the foreseeable future!

  12. Ok, I’m in the arbitrage camp! I’ve been running a credit card arbitrage over $200,000 for the last 5 years. Last year it was worth about $12,000 in earnings/savings.

    There is virtually no damage to our credit scores as we keep the utilization at about 20% of our overall limits.

    The payments are quick, I just bunch them up every week with our other bills and use bill pay. My husband also has a checklist if anything happens to me.

    Is it for everyone? No. In fact, I wouldn’t even suggest it for most people. But I find it fun and challenging.

  13. Though I can’t fathom doing this with 200K, I do have about 15K in high-interest cards that I’m slowly rolling into 0% deals to avoid the $300/mo in interest.

    I believe my case is a little different than using the balance to actually make money, but rather to avoid throwing it away until my debt is gone.

    Juggling 2-3 seems like a real pain in the rear itself though, I’m the kind of guy that avoids rebates because of the chance to mess it up…so no way I’d do it with dozens more cards.

  14. I have done cc arbitrage before, but probably won’t again. Mostly because I”m lazy. But my thinking is this – the “risk” of missing a payment is nonexistent to me. I’ve never made a single late payment on rent, mortgage, cars, credit cards, cable, phone, or anything else that requires monthly payments. Adding a few extra payments just means a few more lines in the monthly spreadsheet.

    That being said, I’m lazy. More work than reward. Not so much risk.

  15. I think it is fairly risky but have met people who have done it successfully. One guy I know had his checking account set up to automatically pay the credit cards back including the large sum at the end.

  16. While I’ve never done it – also decided the gain isn’t worth the trouble, I don’t see there is much of a risk. One can always have minimum payment automatically deducted from checking by the credit cards on the due date hereby guaranteeing that no payment will be late. Then the only thing one needs to do is to check the bill for errors/problems. One also needs to have the money available e.g. on high yield savings rather than a CD, so that the full amount can be repaid at the moment’s notice if any bill shows interest rate change.

    @Aaron’s short story about Joe. In the example Joe sets up automatic payments i.e. the minimum payment is automatically taken from his checking by the credit card companies on the due date. At the same time Joe can set up his paycheck to be deposited to the same account. If any payment is due while Joe is in the hospital, the credit card simply withdraws the money from his checking. If Joe’s paycheck is automatically deposited to the same checking, there is money there. Alternatively, if Joe wants to be totally safe, he sets up his high-yield saving, where he keeps the arbitrage money as the account credit cards take minimum payment from. While this will reduce the principal (though Joe can add money to the same saving account from time to time), this will guarantee that credit cards will always be paid on time and there’ll be no overdraft.

  17. There is no risk to speak of, so long as you keep half decent records, or can make a simple spreadsheet. Making 7,000, essentially out of midair, sounds good to me.

  18. I have a different take on this. I’ve considered going after this for a while but the numbers don’t actually work out too well for me. I held onto the last 5 0% offers so that I could look at them as a whole. ALL of them had transaction fees of at least 2%. Since I would use the 0% loan for the monthly payments I would have to put some of the money into an interest bearing account and could put some into a longer Term CD. The net is about a 3% return. So if I borrow $100,000 and utilize arbitrage I only make $1,000 in a year. I consider this to be of low risk so long as you have a plan (as many people have pointed out), but also of low reward.

    If you consider this high-risk it is very unattractive. Any financial advisor will tell you high-risk low-reward is for morons. BUT if you consider this low-risk then you are looking at low-risk low-reward. Not much better.

    If I could actually get the arbitration up to 3.5% I would pull the trigger on this, but I don’t seem to be able to get around that up front transaction fee.

  19. Just a note: you say “…if I simply saved $2,000 a month in the same savings account…” In fact, this is what you are effectively doing. 0% interest means that every monthly payment is applied directly to principal. That means that the payoff amount is reduced by that much. Since you will make the payoff from the savings account, this is exactly the same as putting the money in savings directly, except that you get to earn interest on it even before you put it in savings.

    Or, to put it another way:

    200,000 in cc debt
    minus 24,000 in payments
    equals 176,000 to pay off

    200,000 in savings
    plus 7,000 in interest
    equals 207,000 to pay it off with.

    Leaving you with 31,000 at the end: 24,000 you saved, and 7,000 you earned in interest.

    Or to look at it another way, you earn over 30% on your 24,000 with little risk.

  20. I’ve done this twice. I don’t have mega-credit limits so I did it with less than $10k both times, so I made a few hundred dollars. It was no big deal, I setup auto-payments and marked my calendar to pay it off a month early to not fall into the 2 cycle billing trap. I had one scare when one of my CC companies screwed up their bill pull feature, but it worked out and I changed it to do a push instead.

    This was back when interest rates were higher and there weren’t fees to do balance transfers. Given that interest rates are now almost equal to the standard 3% balance transfer fee, this is not worth the time. In fact, if you forget to take into account taxes on the interest you could wind up losing money.

    I’m thinking about buying a house in a year or two so I want to keep my credit score clean.

  21. The author wrote: “Of course, this doesn’t consider the minimum payments required to service the debt for my working capital, which could easily reach $2,000 a month. If I make those payments out of my checking account I am essentially spending $24,000 a year to earn $7,000 in interest. If I used the savings account to fund minimum payments I would be depleting my balance and reducing the amount of interest earned.”

    OK, but what if you instead of paying your own money, you use another 0% credit card to make those payments? Seems pretty obvious to me.

    I realize there are risks, but if I want to retire by my 40s without making a lot of money, I’m gonna have to take some risks, right?

  22. I’ve done this a few times in the 15-25000 range. It’s not rocket science and it’s sooo much fun to feel like you beat the banks at their own game. I think the biggest jolt was the mental impact of seeing those kinds of balances on my credit card statements, even when I knew I could pay it off immediately. Easy money with minimal effort.

    It does suck, though, that they ‘punish’ you with a lower credit rating when you have NEVER defaulted on the agreement.

    These seem to have dried up lately, but I’m always on the lookout…

  23. Anyone think of taking this money and applying it to your mortgage? This would be a much better saving that trying to make 3% in a savings account.

  24. A lot of fokes do this, I for one. I have maintained a 150000 blance for 10 years. I payed of my mortage and use a line for back up incase something happens. I look a this as a game, its fun. It does ruin your credit score so if one needs a good score this is not for you. There is nothing to fear but fear its self.

  25. Currently I owe $104k, $29k in credit card debt (mostly balance transfers) and $75k in a home equity loan (heloc).

    I keep this money immediately available in three rewards checking accounts that pay a combined 4.65% APY. I pay 2.24% interest on the $75k heloc and virtually nothing ($18 annually) on the $29k in credit card debt.

    On this borrowed money I earn $4863 per year and pay $1698 per year to service the debt. Net before taxes is thus $3165 annually, or 3.04%

    I must pay taxes on the interest I earn, but I also deduct the interest I pay on the heloc.

    I make monthly payments to a total of eight ‘lenders.’ Four of the payments are made automatically, leaving only four to actually ‘pay’ each month, through electronic bill pay. A small spreadsheet is all I need to keep track of payments and due dates. When the monthly bill comes in the US Mail (I never sign up for paperless statements), I immediately go on line and set up the payment. This method works well for me along with occasional on-line reviews of my various accounts. I doubt I spend more than a half an hour with each of the four statements each month, or say, two hours a month total, or 24 hours annually, at nearly $132 an hour.

    My favorite success story: In March 2005, I transferred $10k (with no transfer fees) to a credit card offering a 0% rate on such transfers. Six months later the credit card company offered to extend the 0% offer as long as I made two purchases a month. Since then I’ve made two de minimus purchases on that card monthly. Now, four years after I received the card, I still have $4k of the ‘lender’s’ money earning money for me, and yet I still pay only the minimum finance charge of fifty cents monthly.

    Minimal work, minimal risk, nice return. Why not?

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