Comments on: Credit Card Arbitrage Not Worth the Risk

By: Rick

Rick — Tue, 10 Mar 2009 20:33:50 +0000

Currently I owe $104k, $29k in credit card debt (mostly balance transfers) and $75k in a home equity loan (heloc).

I keep this money immediately available in three rewards checking accounts that pay a combined 4.65% APY. I pay 2.24% interest on the $75k heloc and virtually nothing ($18 annually) on the $29k in credit card debt.

On this borrowed money I earn $4863 per year and pay $1698 per year to service the debt. Net before taxes is thus $3165 annually, or 3.04%

I must pay taxes on the interest I earn, but I also deduct the interest I pay on the heloc.

I make monthly payments to a total of eight ‘lenders.’ Four of the payments are made automatically, leaving only four to actually ‘pay’ each month, through electronic bill pay. A small spreadsheet is all I need to keep track of payments and due dates. When the monthly bill comes in the US Mail (I never sign up for paperless statements), I immediately go on line and set up the payment. This method works well for me along with occasional on-line reviews of my various accounts. I doubt I spend more than a half an hour with each of the four statements each month, or say, two hours a month total, or 24 hours annually, at nearly $132 an hour.

My favorite success story: In March 2005, I transferred $10k (with no transfer fees) to a credit card offering a 0% rate on such transfers. Six months later the credit card company offered to extend the 0% offer as long as I made two purchases a month. Since then I’ve made two de minimus purchases on that card monthly. Now, four years after I received the card, I still have $4k of the ‘lender’s’ money earning money for me, and yet I still pay only the minimum finance charge of fifty cents monthly.

Minimal work, minimal risk, nice return. Why not?

By: JG

JG — Sat, 07 Mar 2009 00:49:13 +0000

A lot of fokes do this, I for one. I have maintained a 150000 blance for 10 years. I payed of my mortage and use a line for back up incase something happens. I look a this as a game, its fun. It does ruin your credit score so if one needs a good score this is not for you. There is nothing to fear but fear its self.

By: AJA

AJA — Thu, 05 Mar 2009 20:58:30 +0000

A different look at credit card arbitrage.

Pre-pay Mortgage Arbitrage.

There is no common name for this investment idea, so I’ll call it Pre-pay Mortgage Arbitrage. In this scenario, you are already planning on paying $500 extra towards your 8% mortgage every month for one year and you know, with reasonable certainty, that you will have this money.

In Pre-pay Mortgage Arbitrage instead of paying your mortgage down each month for a year, you would take out a low rate credit card offer for $6000 (12 multiplied by $500) and pay that as extra towards your mortgage principal immediately. You then pay off the credit card in the 12 monthly installments you had already planned on paying towards your mortgage.

Here is how the three mortgage payment scenarios differ for a $250,000 30-year 8% mortgage.
_________________________
No prepayment.

Total interest paid over life of mortgage — $410,388.12

Principal balance at end of first 12 months — $247,911.59

Life of the loan — 360 months
__________________________________

Standard $500/month prepayment for 12 months.

Total interest paid over life of mortgage — $359,587.12

Principal balance at end of first 12 months — $241,686.63

Life of the loan — 330 months
__________________________________

$6000 Pre-pay Mortgage Arbitrage

Total interest paid over life of mortgage — $357,696.56

Principal balance at end of first 12 months — $241,456.63

Transfer fee on the $6000 0% credit card loan — $180

Life of the loan — 329 months

Payment to Credit Card — $525 / month for 12 months

By: Doer!

Doer! — Mon, 23 Feb 2009 03:20:52 +0000

Anyone think of taking this money and applying it to your mortgage? This would be a much better saving that trying to make 3% in a savings account.

By: Sluis

Sluis — Thu, 08 Jan 2009 04:48:46 +0000

Like a small number of posters, I find credit card arbitrage most effective for debt reduction. I have been following a plan for the last year to cut down $60k in credit card debt, which is now down to $43k. I am able to pay $1500 a month towards debt reduction. I rely heavily on intro offers and low interest check-writing offers. I currently pay a weighted average of 2.9% interest on the current $43k balance. As one offer expires, I usually have another offer waiting.

Automatic payments are essential for this. I agree with most posters and FrugalDad that you WILL eventually miss a payment. Automatic payments is absolutely required.

FICO scores are certainly affected by taking out large amounts of unsecured credit. My score went from 720 when I had $20k of debt down to 633 when I peaked at just over $60k.

If anybody wants to follow my debt reduction progress, I blog about it at blog.dueminder.com. The site also has free on-line software to help you plan and track debt reduction, including email payment reminders.

By: Cheap Gina

Cheap Gina — Mon, 15 Dec 2008 19:29:47 +0000

I’ve done this a few times in the 15-25000 range. It’s not rocket science and it’s sooo much fun to feel like you beat the banks at their own game. I think the biggest jolt was the mental impact of seeing those kinds of balances on my credit card statements, even when I knew I could pay it off immediately. Easy money with minimal effort.

It does suck, though, that they ‘punish’ you with a lower credit rating when you have NEVER defaulted on the agreement.

These seem to have dried up lately, but I’m always on the lookout…

By: Bob

Bob — Sat, 13 Dec 2008 03:05:18 +0000

The author wrote: “Of course, this doesn’t consider the minimum payments required to service the debt for my working capital, which could easily reach $2,000 a month. If I make those payments out of my checking account I am essentially spending $24,000 a year to earn $7,000 in interest. If I used the savings account to fund minimum payments I would be depleting my balance and reducing the amount of interest earned.”

OK, but what if you instead of paying your own money, you use another 0% credit card to make those payments? Seems pretty obvious to me.

I realize there are risks, but if I want to retire by my 40s without making a lot of money, I’m gonna have to take some risks, right?

By: akb

akb — Wed, 05 Nov 2008 16:35:53 +0000

I’ve done this twice. I don’t have mega-credit limits so I did it with less than $10k both times, so I made a few hundred dollars. It was no big deal, I setup auto-payments and marked my calendar to pay it off a month early to not fall into the 2 cycle billing trap. I had one scare when one of my CC companies screwed up their bill pull feature, but it worked out and I changed it to do a push instead.

This was back when interest rates were higher and there weren’t fees to do balance transfers. Given that interest rates are now almost equal to the standard 3% balance transfer fee, this is not worth the time. In fact, if you forget to take into account taxes on the interest you could wind up losing money.

I’m thinking about buying a house in a year or two so I want to keep my credit score clean.

By: Tom

Tom — Tue, 04 Nov 2008 23:54:35 +0000

Just a note: you say “…if I simply saved $2,000 a month in the same savings account…” In fact, this is what you are effectively doing. 0% interest means that every monthly payment is applied directly to principal. That means that the payoff amount is reduced by that much. Since you will make the payoff from the savings account, this is exactly the same as putting the money in savings directly, except that you get to earn interest on it even before you put it in savings.

Or, to put it another way:

200,000 in cc debt
minus 24,000 in payments
equals 176,000 to pay off

200,000 in savings
plus 7,000 in interest
equals 207,000 to pay it off with.

Leaving you with 31,000 at the end: 24,000 you saved, and 7,000 you earned in interest.

Or to look at it another way, you earn over 30% on your 24,000 with little risk.

By: Allan Rubin

Allan Rubin — Fri, 31 Oct 2008 20:44:48 +0000

I have a different take on this. I’ve considered going after this for a while but the numbers don’t actually work out too well for me. I held onto the last 5 0% offers so that I could look at them as a whole. ALL of them had transaction fees of at least 2%. Since I would use the 0% loan for the monthly payments I would have to put some of the money into an interest bearing account and could put some into a longer Term CD. The net is about a 3% return. So if I borrow $100,000 and utilize arbitrage I only make $1,000 in a year. I consider this to be of low risk so long as you have a plan (as many people have pointed out), but also of low reward.

If you consider this high-risk it is very unattractive. Any financial advisor will tell you high-risk low-reward is for morons. BUT if you consider this low-risk then you are looking at low-risk low-reward. Not much better.

If I could actually get the arbitration up to 3.5% I would pull the trigger on this, but I don’t seem to be able to get around that up front transaction fee.