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.
I am a firm believer in the K.I.S.S principle – Keep 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.