Are you one those people who like to live on the extreme edge? Then credit card arbitrage is the extreme way to net some extra money. But beware! If you take one misstep, you would do more than lose money. You could destroy your credit as well.
What is Credit Card Arbitrage?
Credit card arbitrage is a practice where you take advantage of a credit card company’s offer of 0% interest. You take a free or low-interest loan from the credit card company and invest the money in a high-yield savings account.
You make the minimum payments each month on your credit card. Then when the interest rate is just about to reset, you withdraw enough money to pay the credit card off. The interest you earned in the high-yield savings account is your profit from the transaction. (Keep the interest in the bank and put the power of compounding to work for you while you’re at it.)
Are the Benefits Worth It?
Anyone who has ever had $1,000 in a savings account and seen how much money they earn in interest in a month, knows that credit card arbitrage doesn’t bring in very much money. Today’s high interest accounts are promising 1.03% in interest annually. That translates to about $0.85/thousand/month.
That’s not much money! That doesn’t sound like you would make enough to help you pay off any debts. You might be surprise to discover that some very savvy, credit card arbitragers report profits of $2,500 over three years. That’s not an amount to ignore!
How do they do it? They are able to access larger lines of credit. Multiply that $0.85 by a $10,000 credit line. You make $850.
Most credit card arbitragers say there is a feeling of satisfaction that comes from making money off the credit card companies. After all, they’ve probably made a lot of money off consumers in the past.
Steps You Must Take if You Dare.
Here are some factors you need to consider before you try to make money off the credit card companies.
1) Be sure there are no fees for using the checks the credit card company provides. Many companies now charge a minimum transfer fee. Because the rate is usually 4 or 5%, you could find yourself losing money if the offer lasts less than a year. You have to compare the “spread” between the fees and the money you’ll make in the high-interest savings account.
2) You need to be comfortable with calculating the “spread” between the interest rate you will earn and the interest you will be charged. It’s this “spread” that determines how much profit you make.
3) You must be extremely disciplined with your finances. There is no room for mistakes here. You must make all monthly payments on time. And you must pay the credit card off before the rate goes up. Using the automatic payment option is a very useful tactic.
4) You need to keep careful records. You will lose at this game if you don’t keep track of all your transactions. A spreadsheet that tracks all your payment due dates, terms and final pay-off dates is essential.
5) Remember that payments can be delayed, even electronic ones. Plan to pay off each credit card at least 7 days before the payment due date. It’s not worth taking chances.
Credit arbitrage can yield profits. Yet, don’t run out and start taking advantage of credit card offers unless you are an organized person. If you haven’t been disciplined in the past, practicing arbitrage could lead to a worse financial condition, rather than a better one.
You must be an individual who pays attention to detail. The fine print can trip you up. One forgotten payment can erase all your profits. It’s a game where skill is required!
