Credit Card Arbitrage I – What is it?
Credit card arbitrage seems to be a popular strategy to make a few bucks in the personal finance blog world. I’ve personally never done it myself, but the concept is simple enough for me to explain it and give my opinion on whether it’s worth the fuss.
What is credit card arbitrage?
Credit card arbitrage is where you take a low rate balance transfer promo offer from a credit card company and invest it in something that will hopefully give you a higher return.
How do you do it?
The beauty of this arbitrage is the simplicity.
- Apply for the credit card offering the 0% balance transfer/cash advance.
- Once approved, write a credit card cheque to yourself and deposit it into a high interest rate savings account or a GIC.
- Before the balance transfer offer expires (usually 1 year or more), pay back the credit card in full.
- Note, NEVER make any purchases with the credit card as they will charge you with regular interest.
This process will enable borrow money at 0% and keep all the interest that it generates.
Options on what to do with the money
In order for it to be called arbitrage, you need to make a profit from the deal. However, in my opinion, guaranteed profit is the recommended route to take.
Here are some options:
- Place it in a high interest savings account, like PC Financial (4%) or ICICI (4.5%).
- If the time line is long enough, you can place the funds into a 1 year GIC (4.5% @ PCF, 4.65% @ ICICI).
- You could use the money as an interest free RRSP loan. The only issue being that you will have to make up the difference between what you owe and what you get on your tax return. Even so, your tax return will probably not get to you in time to pay back the balance, so you would have to ensure you have cash on hand to pay back the loan in full.
- Placing the money into the stock market for 1 year is too risky for my blood. However, for those of you willing to take the extra risk to put the money in the markets, here are some free stock trading tools that I use.
Implications
- For those of you who don’t know already, interest income is taxed 100% at your marginal rate. For more info read my article about how Canadian investment taxation works. So if your marginal rate is 40%, then 40% of your interest income/profit will be taken by the government at the end of the tax year.
- The second biggest drawback of this strategy is the potential draw down of your credit score. If you borrow the maximum balance on your credit card and keep the balance for a period of time, your credit score can be affected. The solution? Only borrow half of your credit limit.
Tomorrow, in Credit Card Arbitrage II – An Analysis, I will get into the offers available to Canadians, some number crunching and final conclusions. Stay tuned!
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40 Comments, Comment or Ping
1. The Financial Blogger
I heard a lot about CC arbitrage but never tried it myself. When you write a cheque from a credit card, it is from an existing credit card that you have right? Then, you transfer this balance onto a 0% transfer new credit card right?
Therefore, your first credit card will drop down to 0 again. So this technique should not affect your credit score that much then. Mainly because Are you going toeven if you take the full amount of your credit card, you will still show 50% debt-to-available-credit ratio for the two cards. If you don’t have much on your other credit accounts, your ratio will be less and won’t affect your credit score at all.
All of a sudden, this sounds very appealing. I guess that making an extra few bucks would be great. I am looking forward to the part II of this post ;-D
Sep 3rd, 2007 @ 8:28 am
2. FrugalTrader
Hey FB, The concept is that you’ll have to sign up for a new credit card that offers 0% balance/transfer cash advance. Once you receive the new card and cheques, you write yourself a cheque and deposit it in your “savings” account to collect the interest.
Stay tuned for tomorrows post!
Sep 3rd, 2007 @ 9:16 am
3. The Financial Blogger
Hi FT, how does writing cheques to yourself from a new card constitute a transfer? I always thought that 0% transfer offer were to transfer existing balance on your already existing credit cards?
So basically, you are saying that I can apply for a 10K new CC with a 0% transfer for a year let’s say. Once I receive my card, I write a CC cheque to myself in the amount I want and I can invest that money for free for a year?
Sep 3rd, 2007 @ 9:30 am
4. FrugalTrader
Hey FB! You got it! Write a cheque to yourself and invest the money. Typically, you can use credit card cheques to pay off other balances, which would be a balance transfer.
Sep 3rd, 2007 @ 11:04 am
5. DtotheC
It would be interesting to hear from someone who has done this in Canada. Jonathon at MyMoneyBlog has written extensively on this subject, but I haven’t come across anyone in Canada who has yet.
I wanted to try it myself, however, I’m a student at the moment and the banks won’t extend me enough credit or a decent enough credit card to make it worthwhile.
Two things i’d like to know about:
1) if i understand 0% balance tranfers correctly, you still have to make payments every month on the balance owing. This would be taken from the money you invested. (Easy if in a high interest savings account, but maybe a problem if in a GIC?)
2) how to actually transfer the balance onto your new credit card. Jonathon mentioned that he usually does it on the phone while setting up the new card. I’m wary about writing a check to myself since it might be construed as a cash advance rather than a balance transfer. The difference being, interest is charged on a cash advance from the moment it goes through. This would be bad.
Can anyone clarify it for me?
Sep 3rd, 2007 @ 11:09 am
6. FrugalTrader
Tomorrows post will focus only the technicalities.
1. With the offer that I will post about tomorrow, you will have to make $10 payments every month. In my opinion, keep the money in the GIC and pay the fee “out of pocket”.
2. With this arbitrage, the point is to get cash into an interest bearing investment. I’m not sure how to get the cash into a savings account without writing a cheque. In this scenario, yes, writing a cheque would be a cash advance, but it will be @ 0%. However, here is at least a 1% fee on cash advances (MBNA), which I will talk about in detail tomorrow.
Sep 3rd, 2007 @ 11:17 am
7. The Financial Blogger
That’s great, I didn’t think CC companies would let you write cheque to pay your other credit card and that in fact, you could simply withdraw the new money and invest it.
I would expect CC companies with 0% trsf to control the transfer actually!
Sep 3rd, 2007 @ 11:19 am
8. The Financial Blogger
Then, instead of writing a cheque from the new CC, how about withdrawing money from an existing credit card and than transfer the balance to a new 0% trsf CC? You will not have to pay fees and you will get to the same result right? On top of that, you won’t hurt your credit score that much…
Sep 3rd, 2007 @ 11:42 am
9. FrugalTrader
I think you may be right FB, perhaps CC companies would have issues with payment from another CC. I’m not too clear on this issue. But for the purposes of investment, cash advances are what’s needed.
If you withdrew money from an existing credit card, that would be considered a cash advance and will face a cash advance “fee”. Typically 1%.
Sep 3rd, 2007 @ 11:52 am
10. Pauls
Another angle:
Is it possible to be able to string together no interest offers so that one can pay off another. By “string together” I guess I mean to take out multiple offers from multiple cards, and use the cash to pay off the other card when it comes due.
Also, I know FT doesn’t like this, but investing in a dividend ETF might be a fairly safe way to get some potential capital appreciation upside.
Sep 3rd, 2007 @ 1:00 pm
11. Nars
Do you know any Canadian CC companies which give 0% APR for a year?
Thanks
Sep 3rd, 2007 @ 1:33 pm
12. FrugalTrader
Pauls, the only issue is that 0% APR CC’s in Canada are fairly rare, however, there are a couple available. Yea, i’m not a big fan of using money for 1 year to invest. What if it came time to pay back your balance, and the market tanked like it did in July/August past? You would end up having to pay the difference out of pocket.
Nars, tomorrows post will outline a couple of 0% apr credit cards available to Canadians.
Sep 3rd, 2007 @ 2:15 pm
13. nobleea
I realize it’s pretty much guaranteed money, but is it really worth it? i mean, if you to take a 10K balance, then you’re looking at around $450 in interest. Minus the income tax you’ll have to pay on it at say, 36% marginal rate. Now you’re down to $290. Plus the intangibles of having this on your credit score (it stays on the record for 7 years, even if its paid off?). Does the credit score not go down if you get in to a habit of applying for credit often? And then having to make minimum payments every month. Works out to about $20-25 a month.
If you expect the US$ to go down further (I do, over time), then you could open an american savings account (which pay more in interest) and then get some capital gain from the currency drop. Of course, you’d have to be careful how to do the forex as this could destroy all your earnings. Earnings are not guaranteed then.
Sep 3rd, 2007 @ 2:22 pm
14. Rod Payne
I’m doing this (in Canada). I’ll wait until tomorrow’s post to relate my experiences.
Sep 3rd, 2007 @ 4:31 pm
15. Bean Counter
I’ve done this several times in Canada. Basically you need to look for new credit card for 0% transfer. I’ve made several thousand (in total) of interest income from these deals. However, one thing you need to take into account is the hit on your credit scores when you apply for new credit card. I’ve heard that new credit card (less than 12 months) would hurt your credit score. Also each credit check would hit 3 points from your existing score. Therefore, it may affect you if you plan to apply credit within a year.
Sep 3rd, 2007 @ 6:02 pm
16. The Financial Blogger
Bean, your credit score will not necessarily drop that much. In fact, a hard hit (such as a credit card request) will hurt your credit score by 1 to 5 points depending on how many demands you make and what are your existing credit behaviors.
If you have a strong credit score (over 700), it’s not 5 points that will hurt you. However, if you don’t have much credit accounts (like 3 credit cards and a student loan for example), you might hurt your balance-to-available-credit ratio. This will affect your credit score by more than only 5 points (it can be more than 20 actually).
Sep 3rd, 2007 @ 7:08 pm
17. Jerry Hung
There are 2 threads on this in RedFlagDeals
One from Citi 0%, one from MBNA I believe
I thought about them, but then decided not to bother. There are other ways to make money
- don’t want to hit my credit score too hard (which I’m sure I’m fine)
- have to remember to cancel before 1 year
- not really that much profit, after tax. Of course it depends on your limit as well
Maybe tomorrow’s article will change my mind, you never know :)
Sep 3rd, 2007 @ 8:13 pm
18. Bean Counter
FB – totally agree with your chain of thought. I do maintain a healthy credit score (around 780) and that’s why I’m confident using the 0% balance transfer to make passive income would not materially affect my credit score. I was just tring to remind people with plans to do financing in near future should take their credit score into considersation when applying credit cards and doing 0% balance transfer. Personally, I’d tried utilizing all possible avenues to make as much as I can.
Sep 3rd, 2007 @ 9:11 pm
20. credit card
Well I think credit cards helps us to score a good credit as we get higher return when we go for the credit card arbitrage. Like his we can make and save money.
Sep 14th, 2007 @ 2:05 am
23. oOKitijimaOo
I have invested $10,000 of the credit card cash advance into various mutual funds. I will let you know how I do within the 15 month time frame.
Oct 8th, 2007 @ 5:47 pm
25. canadian dollars
If one does the credit card arbitrage but cancels the card after a year, do you know if there’s a hit on one’s credit?
Dec 7th, 2007 @ 1:51 pm
26. FrugalTrader
cad$, i’m going to drum up a post about your question, stay tuned.
Dec 9th, 2007 @ 3:12 pm
29. Damir
I was on a “Credit Card Arbitrage” throughout 2007. The credit card was charging 1% interest. I parked the money in a 4% saving account.
Is the interest I paid qualified as an investment loan for tax deduction?
Would it qualify if I used GIC instead(as it stands for Guaranteed INVESTMENT)?
Feb 13th, 2008 @ 12:12 pm
30. nobleea
Damir;
Yes, the 1% interest is tax deductible. But you must also pay taxes on the 4% you earned in the savings account.
Feb 13th, 2008 @ 12:28 pm
32. ASAP Credit Card
We’d love to get your feedback. We recently started a Worst / Best Credit Card Issuers Poll. Feel free to stop by and give us your opinion.
Mar 4th, 2008 @ 3:21 pm
33. Sean
This article should be titled, how to serve yourself up as a hot lunch for the banks.
Mar 26th, 2008 @ 1:04 pm
34. JR
Sean, I call this a chapter of using OPM’s the Canuck way.
Timing is everything, as is the no fee & no carrying charges Arbitrage.
I’ve used it, but unlike Frugal mentioned on writing a cheque to yourself it is generally considered a cash advance … & does not always work that way, for free anyway.
One option I used was to go out with CC 1 and purchase something big. I did this at $13k, I went to the Sony store and bought $13k of the most expensive home entertainment equipment there is.
Having the pre approved MNBA zero 12 months interest card ready to go, when the bill came in on CC1, I did the balance zero interest, no-fee transfer to CC2 12-months.
Within 2-weeks of all of this I returned the purchased items to the Sony store (policy return for full refund) and they weren’t too pleased, however, CC 1 had a credit of 12K. I called CC1 company and said “close my account” and send me the money.
Now $13k in hand for one year, what do I do?
Timing is everything … and I did this twice
Example one: December time frame, maxing on RRSP’s (since I hate these, unless I can profit from the exercise)I slapped $10k into an RRSP daily interest account with TD.
Early January I took $10k out in $5k lots, (minus the 10% witholding tax)giving me $9k, not forgetting I have $1k of tax credits, but will have to deal with reporting the $10k RRSP withdrawal next year.
With that $9k + $1K from the $3k left from the CC1 closedown, this time I slapped $10k back into the RRSP again, putting this time into the Questrade RRSP (fee free) trading account. What I used the $10k for to get more OPM’s and further tax savings/refunds, I shall tell you later.
Now I have a $20k RRSP deduction, which in my case provided a refund of $8k in early April… always efile
I still have $2k of cash from the CC1 return, $8k from a tax refund, totals $10k … What should do with that $10k before year end, should I stick it in mut-funds, do the SM manouvre, pay down the mortgage and increase the HELOC …
Since I dislike paying taxes, dislike paying others to manage my money from the likes of financial institutions, stock brokers, FA’s and the Mutfund companies, all IMO since I’m frugal, take their service charges, broker fees and MER’s on my behalf and all of whom are not responsible for the downside of my portfolio. There are no guarantees I’m told by all of these people.
My initial financial goal (since I work for an employer)was to see if I could get all of the income tax money back that was taken from my wages at source and get this back using the Aribitrage method (starting out with zero & using OPM)then working my way up to building equity and hopefully getting a low interest lown that is even more leverageable.
This one method allowed me to build my own version of frugal’s million dollar journey, adapting and already using many of the articles discussed in Frugals web-blog
TBC
Apr 5th, 2008 @ 4:10 pm
35. misanthropope
yeah, screw around with credit cards. you might make five or ten dollars, and what’s the _worst_ that can happen, right?
Aug 7th, 2008 @ 1:13 am
36. Sean
I am not going to explain all of the permutations or ways that this strategy could lead to serious financial losses. I will simply state that investment with borrowed money is not zero risk. And Arbitrage is only arbitrage if the risk is zero.
Without being specific, I would caution anyone who cares about his financial well being to use extreme caution employing any of the strategies used on this page.
Aug 7th, 2008 @ 7:51 am
38. Colourful Money
Solid article from 2007. Here’s an updated article that adds value and complements this article: http://colourfulmoney.com/credit-cards/credit-card-arbitrage/using-credit-card-arbitrage-to-earn-money/
May 17th, 2009 @ 5:56 am
40. cannon_fodder
FT
I received a new 0% credit card from MBNA and closed out my old one. This time I have 15 months to pay it back and the limit went from $20k to $30k. Most of the money will go to TFSAs and RRSP contributions.
Feb 8th, 2010 @ 11:49 pm
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