In its simplest form, credit card arbitrage is a process where individuals take advantage of interest rate differentials.
Let me explain the concept with the help of an illustration:
John borrows $10,000 from XYZ Credit Card at 0% APR for twelve months. He transfers this money to his bank account and earns 3% on a twelve-month CD. For a period of twelve months, John will be earning 3% ($300) for literally doing nothing. His earnings could increase to double digit numbers if he were to invest these funds in opportunities generating rewards at that level. Of course, this over-simplified example ignores certain fees, costs, and risks associated with initiating an arbitrage.
There are many self-proclaimed credit card arbitrage experts who brag about their supernatural ability to make thousands of dollars every year. While we doubt the authenticity of the numbers, theoretically it is possible to make some extra money, provided the practice is legal in your state and not prohibited by your lender’s terms and conditions.
You may have to overcome certain barriers to get the cash advance deposited into your checking account. Some credit card companies have imposed limits and restrictions when it comes to cash advances.
Consider the following caveats as starting points in your research about arbitrage:
Be alert to sudden changes in interest rates
Even if you signed-up for a 0% APR credit card, you must be extremely careful about trigger points that could spike your interest rates at a moment’s notice. If that were to ever happen, you could end up losing a lot of money. Remember, credit card arbitrage works only if the interest rate differential is substantial.
Earnings attrition could occur at either end of the arbitrage spectrum as well. For example, your investment portfolio may also witness a sudden drop in interest rates.
Calculate all fees associated with the transaction
You could incur fees at various points during the arbitrage process. Cash advance fees, bank fees, and interest payments are a few examples.
Pay your balance regularly
To take advantage of the 0% APR, you will have to pay your minimum balance every month. Delays could trigger late fees and also cause your 0% interest rate offer to terminate prematurely. The entire balance will have to be paid off before the duration of the promotional 0% APR expires.
Credit score will drop temporarily
You may lose some points on your credit score as your debt to total available balance fluctuates. As you start making payments toward the principal the score will increase gradually.
Please note: We haven’t checked into the legal aspect of arbitrage nor do we recommend or endorse credit card arbitrage. You must always check with a certified investment professional and a licensed attorney.
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