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Fifteen years ago I regularly received 0% no-fee credit card convenience checks. I cashed them for the max and put the money in 4.5% online savings account. In other words I borrowed for free and invested the money — basic credit card arbitrage.
But the game has changed. Now the average savings account pays 0.06% and those no-fee convenience checks are mostly gone. So can you still make money with credit card arbitrage?
Yes, you can. I still do. It isn’t as easy, but if you know the right strategies you can pick up an extra few hundred dollars (or more) annually using free or cheap money from credit card companies.
I covered this briefly in a previous post on ways to make or save money with credit cards. I’m sure some readers wanted to know more, so here is your guide to credit card arbitrage.
Step 1: Get the Right Credit Cards and Convenience Checks
For credit card arbitrage you need a decent “spread” between your borrowing rate and the rate you earn when investing the money. I consider 1% the minimum spread worth the time. For example, you would meet that minimum if you got money from the credit card company at 0% interest and put it in an Ally savings account at 1.05%
In this example you would make only $52.50 in a year using $5,000 of the credit card company’s money. Fortunately there are better returns to be had, as you’ll see. But it all starts with the cheap money.
You want to borrow at as close to 0% as you can, and for as long as you can. Some of the best arbitrage cards offer 0% interest for the first 21 months, and a few even offer balance transfers with no fees. Having no or low fees will help when you roll over your debt (more on that later).
High credit limits help too, since you need thousands of dollars working for you to make a decent profit. If you have a good credit score and income you’ll probably be approved for higher limits, but you can also call your card issuers to ask for a credit limit increase.
You may not need any new cards if you regularly get 0% convenience check offers from the cards you already have. Whether these will work for credit card arbitrage depends on the fees.
For example, every month I get 0% interest convenience checks from several of my card issuers (I have over 20 credit cards). A typical one gives me a choice of 0% for 18 months with a 3% fee or 0% for 12 months with a 1% fee. A 3% fee is too high. At 1% I can pay $50 for $5,000 and put it in a savings account that pays 5% annual interest, and collect $250 for the year.
That 4% spread leaves me with a profit of $200 on that transaction. Of course, you can do more than one transaction to make more money.
But wait. Where can you make 5% from a savings account? More on that in a moment, but first…
Step 2: Put Together Your Pile of Free or Cheap Money
What if you don’t get any low-fee 0% convenience checks? How do you collect your free money when you sign up for that no-interest-for-18-months credit card? I mentioned that it was no longer easy, so here’s the rest of the story…
You have to charge everything you normally buy to your 0% cards and make only the minimum payments required. After a few months you’ll have a balance of thousands of dollars.
As you use the cards you need to “pay” for your purchases by putting an equal amount into your desired investments, so the money will work for you and be there when the time comes to pay off the entire balance. In other words, if you charged $1,100 on the card, be sure you put that much (or even a little more) aside.
When you finish off one card (reach the limit), you can start another. You’re effectively borrowing all the money you charged at 0% interest.
That brings us to…
Step 3: Find the Right Liquid Investments
You really can get 3% and even 5% in savings and even checking accounts. And yes, there’s always a catch.
For example, I get 5% annual interest in a savings account connected to my Insight Debit Card. But I have to first load the card from my regular checking account, then transfer the balance to the savings account, and then remember to have some account activity every quarter (deposit a dollar) to avoid fees. The 5% rate is limited to $5,000, and it takes a few days (or more) to get your money out.
Mango offers a similar savings account and pay 6% on up to $5,000, but their requirements are even worse (including setting up a direct deposit of at least $800 per month).
Awards checking accounts and Kasasa accounts are another high-interest option. For example, Northpointe Bank’s Ultimate Account pays 5% on up to $10,000, and One American Bank’s Free Kasasa Cash checking account pays 3.5% on up to $10,000.
Those too come with a few requirements. For example, One American Bank’s Kasasa account requires you to enroll in online banking, login online once per month, and make at least 12 debit card charges of $5 or more every month. If you forget to login or only make 11 charges, your interest rate drops to 0.01% for the month.
You can find the best rewards checking accounts online. They’re a hassle, but you need those high interest rates on the investing end if you pay even a 1% fee to borrow the money.
If you can borrow at 0% and you have high credit limits, you might prefer to simply put the money in a basic high-yield account. Everbank, for example, pays 1.11% for the first year, with no hoops to jump through. If you can get $25,000 in free money working for you, you’ll at least make $250 per year without much trouble.
You can also invest in loans on Lending Club or Prosper. Some investors have made returns as high as 12% even after bad loan write-offs. I must be bad at choosing loans, because over the years my Lending Club return has averaged closer to 5%.
I like Lending Club because it has a robust note-selling platform. You may have to sell at a 1% (or greater) discount. You also might pay another 0.5% if, like me, you want LendingRobot to handle the sales for you automatically. But in any case it’s a way to get your money out before the 3 or 5 years the loans usually run, which could be important when you have to return the money to the credit card company in a 12 or 18 months.
Step 4: Manage the Process
As long as the interest rate on a credit card balance is 0% you want to make just the minimum payment required each month. Do this using the money you’ve invested or, to get a bigger return, use your regular income so more money is left in your investments.
With each card or convenience check mark the calendar for a week or two before the 0% rate expires. That will give you time to figure out the next step…
Step 5: Pay Off or Roll Over Your Credit Balances
Just before a 0% rate ends pay that card in full! If you forget and start accruing interest charges you’ll lose everything you gained very quickly.
You may not have to take the money out of your investments. If another card issuer has sent you low-fee 0% convenience checks (you’re saving them, right?), you can pay the balance due with those. Also, when the time draws near you can apply for a new 0% card that offers no-fee balance transfers.
Meanwhile you can also keep adding to your arbitrage balances. How far can you go with this?
One financial blogger has at times invested up to $200,000 from credit card balance transfers. He plays the game at a higher, riskier level. He even invests in long-term CDs with the assumption that he’ll find a way to roll over the debt using new 0% promotions as the current ones expire.
Can You Do This?
A credit card arbitrageur needs a decent credit score (minimum 700) to get the best offers, and good organizational skills to keep on top of everything. If you don’t have self-discipline you could get yourself into trouble. More than one financial writer has pointed out the dangers of credit card arbitrage.
It works best if you enjoy playing this sort of financial game. After all, it can be tedious, and with today’s low interest rates on savings you aren’t likely to make much money. Fortunately there are some…
Ways to Make More Money
One trick for maximizing your profit is to apply for cards offering 0% interest and a signup bonus. You typically need to charge a certain amount within 90 days to earn the bonus, which ties in well with your plan to run up the balance and invest the money. In fact, with reward credit cards offering bonuses as high as $650 you’ll probably make more from bonus than from any interest you earn on the arbitrage spread.
Another trick is to use cards that offer a high cash-back rate. For example the American Express Blue Cash Everyday card offers 3% cash-back at supermarkets, a bonus of up to $150, and 0% interest for 12 months. If you spend $6,000 at grocery stores to max out that 3% category you’ll $180 cash-back, plus that $150 bonus, and the interest you make investing the balance payoff money during your interest-free period.
You’ll notice that most of these financial games are more efficient (and profitable) when you put several different strategies together. For a final example I’ll tell you about a credit arbitrage deal I did that involved a couple extra elements.
I went to to open a SunTrust checking account for the $200 bonus. The banker convinced me to get their rewards credit card. It offered 0% interest for 15 months, 5% cash-back on grocery store purchases of up to $6,000 the first year, and an extra 10% on cash-back redeemed into the checking account (making it 5.5% total on those grocery store charges).
I quickly ran up $6,500 in charges, mostly at grocery stores. Furthermore, I bought a lot of $500 Visa Gift cards, a kind of manufactured spending explained in a previous post. I earned about $350 cash-back, or $290 net after $60 in fees for the gift cards. (Fortunately I had a fee-free way to liquidate the gift cards, turning them into cash.)
Rather than pay off the credit card in full I put $5,000 in a savings account connected to my Brinks debit card, which at that time paid 5% interest. Over the next 13 months I made about $250 in interest before using the money to pay off the credit card.
Altogether I made around $540 with the card (and the $200 checking account bonus that got me into the bank to begin with). Almost half of that was from the credit card arbitrage.
Credit card debt is risky. You have to be disciplined and invest enough to pay all the balances when the time comes. But even a careful person can make a mistake, and with this kind of arbitrage that can be costly.
For example, if you forget to pay a card balance before the 0% interest period ends you might find yourself paying 24% annual interest (the cash advance rate on many cards). One month of that would eat up a year of profit from a 2% arbitrage spread. By month two you would lose a chunk of money.
There is another risk. My credit score dropped 51 points because of my credit arbitrage activities. This was because the high balances affected my credit utilization ratio. It didn’t matter to me, and the score rebounded in a few months once I paid off the cards. But it’s something to keep in mind if you plan to borrow for a home and need to keep that score high.
If you’ve ever tried credit card arbitrage, tell us about it. Keep on frugaling!