That’s what a reader, Maha, wanted to know. Maha sent me a note to let me know that trying to find out exactly what credit card arbitrage is all about, is like reading the middle part of the book without being able to find the beginning.
So I’ve realized that I talk just like I write! Sometimes I just start talking (or writing) about a subject without any introduction. In real life, people stop me and say, “What are you talking about?” So anytime I write an article, if it’s not clear, feel free to ask me more about it! Either leave a comment or send me an email. I love to share things I learn, but if they don’t make sense, then it’s not helpful.
Let’s get back to the credit card arbitrage.
What is Arbitrage?
From wiktionary, one of the definitions is:
Any market activity where a commodity is bought and sold quickly for a profit which far exceeds the transaction cost.
A Simple Example
Let’s say you are walking down the street and you see a sign that says, “Lemonade For Sale, $1.00.” As you walk to the next block, you see another sign, “Lemonade Wanted – Will Pay $2.00.” Of course, you think to yourself, I could make $1.00 if I buy the lemonade from the first stand and sell it to the second.
You walk to the first stand and buy all his lemonade – 50 cups for $50. You walk down the street and sell all 50 cups to the second stand for $100. You pocket $50 and go on your way.
This is an arbitrage situation. There’s a price differential between two markets that yields a profit. It’s easy to see in the lemonade example. There are real life situations where arbitrage situations exist, but sometimes they aren’t as clear as the two lemonade stands.
An Arbitrage Example
Here’s another example. A friend offers you $10,000 to use for one year any way you like. For the use of the money, the friend charges you $99. You realize that you can deposit the money in your ING account and earn 3%. You quickly realize that you could make over $300 in interest and after paying your friend $99, you will have made over $200 profit.
Credit Card Arbitrage
The above situation is exactly what is happening in credit card arbitrage. Instead of a friend, you are dealing with a company. Here’s how it works:
- Take a 0% balance transfer from the credit card company.
- Deposit the money in your savings account to earn interest.
- As payments are due, pay the bill with the money in your savings account.
- When the 0% offer expires, pay off the remaining bill with your savings account.
As long as the interest (less taxes) is greater than the transaction costs, you’ll have made a profit and taken advantage of an arbitrage situation.
Don’t get me wrong… the situation I described sounds too easy, it’s exactly the reason that the arbitrage exists. I’m guessing the majority of the people that try it slip up. They miss a payment, spend the money, forget to pay by the expiration date, etc. And the credit card companies make money, big money, on those mistakes.
Do I recommend it? No. Because it’s so risky and easy to mess up, I wouldn’t want to ever receive an email from a reader that made a mistake and lost a bunch of money!
Why do I talk about it if I don’t recommend it? I do have readers that take advantage of credit card arbitrage. It’s also fun to learn about new things even if you aren’t going to try it.
Arbitrage Extras and Twists
Scale. The larger the amount of money, the more that you can make. We made about $12,000 last year because we were running over $200,000 in arbitrage money. We also have about $1 million in credit limits to pull of such a big arbitrage plan.
How to get the money into your checking account? Some companies offer to send you a check. Others want to pay off a loan. I can easily use my heloc for this.
Use to pay off higher interest loans. We frequently run part of our mortgage at 0% interest rates to save even more money. If we were to ever run out of offers, we would put the money back on our heloc.
What happens at the end of the offer? When the 0% expires, I apply for a flurry of new cards and reallocate our credit limits for bigger balance transfers. It keeps the arbitrage going for another year.
Taking advantage of a spouse. I apply for all the credit cards in my name only. That enables me to run another set of arbitrage under my husband’s name!
We’re currently nearing the expiration on my cards. In the next few weeks, I’ll be “turning over” all my cards into new offers. I’ll write about some of the strategies that I use in more detail as they occur.