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I’m Looking into Credit Card Arbitrage, Am I Crazy?

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Previously, I asked (mostly rhetorically), I have a plasma TV, am I crazy? Most people agreed no, so now I'm stepping up the craziness a level. In the last week, I've been thinking of doing something that I never thought I would - get a credit card with a 0% balance transfer. I had always thought that the risks outweigh the benefits. Lately, I've been think that I was wrong.

It started with reading about Get Rich Slick's Money Farm. On the same day, I came across Blueprint for Financial Prosperity's Don't Cancel Old 0% Balance Transfer Cards. I've spoken with both of these guys in the past and they are brilliant folks. Because they are doing it, it made me think that I should at least explore it - give it a chance and see what it has to offer.

It didn't take me long to realize that my HELOC is currently at 8% and that means I could make some big savings with a 0% balance transfer. Since I have a little over $13,000 there, I'd pay over $1,000 a year in interest. Suddenly this is a quick way to save $90 a month. That's like free cable and Internet for a year. How much "work" would that be worth to you? I think it's worth a bit to me. However, in looking into these things, it seems like it's very little work. I would simply set up an automated payment and alerts in my calendar to make sure that they get there. I would make sure that they are there far in advance, perhaps at least 15 days.

In realizing that I want to know more, I decided that I needed to go to the experts. Jonathan of My Money Blog has an excellent guide, How To Make Money From 0% APR Balance Transfers, which is going to be my bible in this endeavor. I'm going to supplement that with 2Million's Guide to Taking Advantage of 0% Balance Transfer Offers. There's definitely overlap in the two resources, but between the two I expect to be as prepared as I could be without first-hand experience.

Last updated on July 25, 2011.

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Credit Cards

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29 Responses to “I’m Looking into Credit Card Arbitrage, Am I Crazy?”

  1. jim says:

    Send me an email if you want to know more about it, 0% balance transfer arbitrage is pretty easy and I’ve compiled a list of 0% balance transfer offers if you want them.

  2. jim says:

    By the way, thanks for the compliment and no you’re not crazy.

  3. Rich Slick says:

    I guess one of the biggest caveats to the arbitrage game that most people don’t write about often is that you really need large credit lines to make this profitable.

    With a $5000 credit limit at 100% utilization, earning 5% at online bank, you’d make $250. Subtract taxes and any balance transfer fees and you’re looking at maybe $125 net. Not really much to write home about.

    But if you do $25,000 at 0%, earning 5% then your looking at earning $1250 gross. Do this on a couple of accounts and you’re looking at $2500/year.

    The trick if you’re going to float $50k at 0% is to have credit lines totaling 100k to preserve your FICO score. Some people don’t care about preserving their FICO score but I try to keep my above 700 at all times. As always though, try to start small and work your way up when you’re ready. You’ll see how easy it is to make money off these deals.

    By the way….thanks for the mention.

  4. TheMellowOne says:

    You should be aware that doing this will potentially pump up your credit utilization percentages, possibly affecting your credit rating. So if you plan to take out a mortgage or other loan in the near future, this could be a bad idea.

    That said, I recently did exactly what you are suggesting – I rolled my HELOC (at 8.5%) balance of $17,500 onto a 0% credit offer. The savings was substantial, and I was on pace to pay back the HELOC in the time frame of the 0% offer anyway.

  5. I’ve thought about doing this over and over again. Never pulled the trigger. I can’t put my finger on why. The only thought I have come up with is that I have been brainwashed that carrying a balance is bad (almost shameful).

  6. Lazy Man says:

    I’m aware that this will negatively effect my credit rating, but I’m in California and not looking to buy for well, the next thousand years due to sky rocketting prices. My car is a 2001 and I think (knock on wood) that it has significant time left. Worst case scenario, I could re-borrow from the HELOC.

    I’m not anticipating a big hit to my credit though. Since I’m using one debt to pay another debt, it’s really just a different type of debt. I’m going from secured to unsecured.

  7. Thought about doing the exact same thing, although I only have about $5500 in my HELOC right now so the savings would only be about $40/month, but it’s still $40 per month. Not sure how big of hit your credit score would take going from one debt to another. Guess it depends on what your original HELOC line is. Not sure how much of credit score is affected by total debt usage vs each individual card and how far it is from being full utilized, for whatever reason I would think the credit agencies would view a close to max HELOC more favorably than a fully utilized credit card.

  8. Foobarista says:

    My feeling is there are two things here: having existing debt in the cheapest location possible versus “float plays” (ie, borrowing in one place to get a higher interest rate somewhere else).

    The first makes lots of sense in all situations, especially if the debt is in a HELOC; the gain from zero interest in unsecured debt versus 8% interest encumbering your real-estate makes this move a no-brainer.

    “Float plays” work for many people. But whenever I’m tempted to play it, the cash advance rate of 3% makes it look not worth it; the 2% float gain with my effective tax rate of close to 40% makes it not worth it.

    Are there CCs that have 0% cash advances without cash advance fees? If you don’t have existing debt to transfer, how can you get at the 0% money?

  9. bryan says:

    there are cards that waive the BT fee, just search around. u dont have to transfer a balance. have the 0% company transfer $X amount to another unused card w/ a high credit limit. it should show a positive credit which u can request they send u a check for the full amount. deposit into online bank account.

    read more at 2millionblog and mymoneyblog

  10. Lazy Man says:

    Foobarista, you can check out Jonathan’s guide for the specifics, but the short answer is: You can transfer the balance to a card that you already have giving you a credit of say $10,000 and then call up that card and ask for them to cut you a check in the amount of credit (which every place will do).

  11. NCN says:

    Do you simply have 13K left to pay? If I figure correctly, if you pay the loan off in a year, your total interest would be less than $600. If it took you two years, your total interest would be about $1100. If you lowered the rate to zero, you’d be saving about $50 a month. (Check my math… I might be off a bit, but I think it’s pretty close.) Why not focus on the principal with super intensity? (I can’t tell from your post if you are thinking about borrowing money at zero percent and earning interest in a savings account, or if you are transferring the debt from your HELOC to a credit card…?) Either way, I wouldn’t bother. Kick the crud out of the principal, get rid of the debt altogether, and then go looking for some real rates of return.
    NCN

  12. Lazy Man says:

    I’m sorry I didn’t make it clear in the post, but I’d be paying off the HELOC. Then I would apply new payments towards the credit card. If I can get it paid off in a year – great. If not, I can move it to another card or put it back in the HELOC.

    Doing a little math, $13,000 at 8% is $1040 or $86.66 a month. That’s not exactly chump change.

    I could focus on the principle, but I feel that this is a unique time where, with a little effort, I could earn 15% on Prosper.com. I don’t know if that opportunity will be there in a year or two. So I’m playing both sides, putting money in investments while I pay off the HELOC. At the same time, we’ll be financing a wedding for 180 people this year (with a little financial assistance from parents). In addition to this, one of the first rules of Lazy Man is to fully max out 401k and Roth IRAs each year.

  13. NCN says:

    Lazy…
    86.66 is the amount of interest that you pay the first month…
    But the AVERAGE interest you pay for the entire loan is less than $50 per month…
    Check out a mortgage calculator and look at the amortization calcualtor.
    I’m not trying to change your mind (okay, I’m trying to change your mind), but if you
    run the numbers, the total amount of interest paid in 12 months would be 570.19 with
    a monthly payment of 1130.85.
    Thanks,
    NCN (Plus, if you paid extra each month, you’d end up paying even LESS interest!)

  14. Lazy Man says:

    I could make those payments, but the opportunity cost of missing out on Prosper is too great at this moment. Four years ago when it looked like a stagnant stock market and a I couldn’t find a better investment, I think it made sense. I know you may say that if Prosper is any good, it will be around in two years, but I think it will be harder to get in the good loans.

  15. 2million says:

    I think 0% balance transfers can be a powerful, low effort tool to help increase wealth accumulation. My only suggestion is don’t jump in too quickly – as with anything – start small and build up some expierence so you don’t get unexpectedly burned. Good luck!

  16. I haven’t had experience with the 0% BT offers but I’ve bought stuff like a washer/dryer, and Home repair stuff from home depot that way. 1 year 0% APR, I had the money but the 10% off and the year free interest was too nice, so I just paid it off in 11 months. Tell me how it works out. I am not sure I’m nervy enough to do it, but I should be if I play with buying stuff at best buy or home depot and use the 0% offers right?

  17. Lazy Man says:

    Living Almost Large, that’s pretty much exactly what I was thinking. I do those Best Buy offers plus my other credit cards without problems so I figure why not do it on a bigger scale and make (or in this case, save) $1,000.

    2million, I am keeping it small to start – just looking for enough to pay off my HELOC. So that’s one card for the next 12 months. If all goes well, I would consider more in a year, but we’ll see.

  18. fin_indie says:

    I know you say you aren’t going to buy anytime soon, but strange things happen when you need your FICO to be high. If your score is going to take a hit, I wouldn’t do it, or take steps to keep it high as Rich Slick suggested. A low credit score always winds up costing you money in the end, so take that into account.

    Also, and I’m not sure if it’s still true, but insurance premiums in the past few years have had a correlation to your FICO score. Watch out for impacts like this.

  19. Tim says:

    your FICO will only have a short term hit since it is only for a year. So I wouldn’t worry about it. you need to plan, though, for when you are going to want a loan, though.

    i set up my monthly payments a couple days after the next scheduled statement date. this ensures that you are not going to overlap or miss the monthly minimum payments. your online cc statement will show when your next statement is scheduled.

  20. Lazy Man says:

    Everyone seems to say that my FICO scores will take a hit, but I’m not sure it will be that much. I’m switching from one kind of debt to another debt, not adding any new debt. The overall credit utilization should remain the same. Plus this will allow me to pay off that debt faster, so I’m thinking that in the end it won’t be that big a change.

  21. Jonathan says:

    You’re not crazy, but you can’t be Lazy ;)

    Are you for sure going to pay it off in 12 months? The good thing is that if it is on a HELOC, if for some reason something horrible happens then you can just move it back to the HELOC right?

    Your credit score may decrease a bit since it’s unsecured debt now vs. secured, but it definitely won’t kill you.

  22. Jonathan says:

    “86.66 is the amount of interest that you pay the first month –
    But the AVERAGE interest you pay for the entire loan is less than $50 per month – Check out a mortgage calculator and look at the amortization calcualtor. I’m not trying to change your mind (okay, I’m trying to change your mind), but if you run the numbers, the total amount of interest paid in 12 months would be 570.19 with a monthly payment of 1130.85.”

    NCN, the idea is that Lazy Man won’t be paying the amount based on a 1-year repayment schedule anymore. He’ll move the $13k to a credit card, and only pay the 2% minimum, but keep putting money away as if he was paying off the HELOC. Instead, the difference (hopefully) will be in a bank earning 5%. Thus, he may not get the full interest benefit, it will be somewhere in between. (Aren’t HELOC amortized over a long term, like 10 years anyways?)

    Personally, I think Prosper is more work for the reward than 0% balance transfers, so if you like doing Prosper I think you’ll do fine with this.

    Let me know if you have any specific questions. I expect you to teach me about HELOCs later :)

  23. Lazy Man says:

    No, Jonathan, I can’t be sure that I’ll pay it off in 12 months. I’ll make a run at it though. As you say, it’s not a big deal as I can always borrow from the HELOC when the period is over.

    The difference between Prosper and credit card arbitrage is that there is no penalty if I don’t make a loan for a few days. Also, there’s really no fine print that could make the whole deal worthless. Lastly many people that I talk to find Prosper fun and not “work.”

  24. i’ve been trying to get in on the action too. however, all my balance transfer deals are at 5-6%.

    even though i have good credit, i currently have about 12 mortages on it. last year i was upto about 20!
    i think this affects my rate a bit.

  25. […] I’ve been fighting with Discover to get my Credit Card Arbitrage experiment going. It turns out that my company’s phone number doesn’t match their system. To […]

  26. […] but it’s hard to not believe that something is conspiring against me in trying to do my credit card arbitrage plan. If I can’t get a credit card to begin with, it’s just not going to end up well. The […]

  27. landlady says:

    I’ve done this — transferring my HELOC (10%) to a 2.99% fixed balance transfer rate (for the life of the balance. It saves me $1500/year on interest, and only cost $135 to set up.

  28. Handlingthetrurth says:

    Yes, you are crazy to even consider this!

  29. Jerm says:

    I am having a bad time with this arbitrage.

    I just transferred $25k to a Bank of America credit card – leaving a -$21000 balance. I then transferred $18800 (the max ‘cash advance’ amount) this to a BofA checking account. Bank of America put a hold on that card and left a message on my phone. When I called them up they proceeded to ask a bunch of questions – including why I transferred the money (I just said “arbitrage” – a word she did not understand).

    She said if ever “overpayed” again my account would be closed. Nice.

    My account still seems to be frozen. Hopefully I can get this resolved quickly.

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