Guest Post: "Can You Profit from Credit Card Arbitrage?" by Linda Bustos

Shortly after college graduation I had a modest line of credit debt that I used a low APR credit card balance transfer to pay down. After transfer fees, I really didn’t save that much money since the introductory period was only 3 months, but it felt good to wipe that credit line clean.

After the balance was paid off, I stopped using that card all together, as I have 2 other cards with longer histories. But from time to time, the low APR credit card company rings me up to ask for my business back. I usually disappoint them, telling them I never carry a balance and have no major purchases on the horizon.

I received such a call yesterday from my once-low APR card (now 14.99%), offering me 0.99% for one year on balance transfers. After the usual “I don’t carry balances, I don’t have major purchases coming up, I have a ton of savings in a high interest account, bla, bla, bla, bla…the caller suggested I borrow money and reinvest it – make money on the spread.

To be honest, I know a lot more about budgeting and using credit wisely than I do about investing. I’m a risk-averse person by nature – you might say I’m quite nervous about investing. So I replied that I’m not interested in investing, I have my safe little high interest savings account (3.75%) and with that, I’m happy.

But after ending the call I wondered, what if I took out a loan, transferred the balance to this 0.99% credit card, invested the money in my safe-and-highly-liquid high interest savings account, and turned a profit? Would it be worth it?

This is one form of “credit card arbitrage” – but it’s not as straightforward as I borrow $X at 0.99% and earn 3.75% therefore I’m 2.76% ahead. There are a few things you need to realize before taking the plunge.

Fees and Interest Charges

When you max out a higher interest rate credit card with a cash advance, you may pay a cash advance fee or higher-than-normal interest with no grace period. You will pay interest from the day you take your advance until the transfer is completed to your low interest card.

You likely will pay a 2-4% transfer fee on the amount of your balance transfer to your low APR card also which chips away at your profits.

Monthly Payments

Don’t forget your 0% APR card may still require a percentage of your transfer be paid each month, reducing your principal but nonetheless requiring timely payments. If you miss one, you could quickly find that low APR skyrocketing.

Taxes

Your interest earned in your savings account is taxable income, while interest charges are not tax deductible. Depending on your tax bracket, this could bring your profit margin to almost nothing after all other fees and charges are taken into account.

Impact on Your Credit Report

Every time you apply for a credit card, the credit lender will make an inquiry of your credit report. If you apply for a number of credit cards at once, that means more credit inquiries. And if you don’t already have a high interest savings account, that means more inquiries when you try to open one.

Your Debt to Credit Ratio

When you max out a credit card, you can dramatically increase your total debt used vs. your total available credit, making you a higher credit risk for any other loans you may need in the future. Higher interest rates on long term financing for cars and homes mean higher monthly payments for many years.

Doesn’t sound worth it in the long term for a couple hundred bucks over 1 year, does it? Personally, I’m just going to continue with my frugal lifestyle and consistent savings.

Still want to play the game? Here’s what you should know:

Look for balance transfer credit card offers with a long introductory period. Chances are if you shop around you’ll find a card with an intro period of 12 months as opposed to 3, 6 or 9 months, no transfer fee and no annual fee. If you have already used a balance transfer card and the
account is still open, call your credit card company and request another transfer with the condition it’s for 12 months. They just might give it to you.

Don’t you dare make any new purchases on balance transfer cards, not only will you be paying high interest on purchases (often with no grace period), your payments will also be applied to your lowest interest balance first, not your most recent purchases. So your new purchases will
accrue interest charges until your whole balance transfer is paid off. Oof!

Never miss a payment on any bill. If any of your credit agreements includes a “universal default clause,” your creditor has the right to bump up your interest rates. You could end up paying more interest on several loans. Because your savings interest is taxable income but your interest
charges are not tax deductible, this can really hurt.


About the guest author:

Linda Bustos is an editor for CreditorWeb, an information resource for credit cards and a credit card comparison.