Credit Card Arbitrage

I could be wrong, but I’m pretty sure there’s a clause in your agreement that prevents you from using the borrowed funds to invest.

Black Swan Wrote: ------------------------------------------------------- > I could be wrong, but I’m pretty sure there’s a > clause in your agreement that prevents you from > using the borrowed funds to invest. My understanding is that they rely on being able to charge the default rate (25% +) for whatever reason E.g. your minimal payment arrives late, and you don’t worry about it/ notice it until you receive your next statement, then the CC would charge you 25% + for a month, which is will conver the rest of the time the CC lent you money at 0%

Black Swan Wrote: ------------------------------------------------------- > I could be wrong, but I’m pretty sure there’s a > clause in your agreement that prevents you from > using the borrowed funds to invest. You are wrong. At least for Chase, Citi and BofA credit cards. I can not speak to other credit card companies. Olivier is correct in that they will count on you screwing this up and being able to charge you 25% + for the remaining time you have a balance. There are very few individuals that actually do this. Those that do are not profitable to the credit card companies. Go to the link I posted earlier, there are literally hundreds of individuals that are effectively doing this exact thing. If you manage it correctly, it can be profitable. However, it will never make you rich.

The two cards listed in the article for the “super balance transfer” charge a 3% front load fee on the transfer. If the truly risk free rate is around bankrate…com has the current 1 year treasury at 2.1 and most savings fall around 3-4 %. I don’t see an easy arbitrage here after transaction costs. Arbitrage requires a price difference between two like investments. Any amount of risk added to your investment makes it arbitrage with risk. Total different story than riskless arbitrage. LTCM was doing arbitrage with risk, and they were smart guys. I’m not saying that there’s no profit, but just that it’s not riskless or on truly 0% because there’s still a transfer fee of 3% and transaction costs on top of that.

True, gone are the days of 0% for 12 months with $0 transaction charges and 5% interest rates at ING. These cards are still available, mostly from Citi (I actually have a few offers right now with these terms) however they are much harder to find now. Let alone the decrease in risk free rates. Generally the CC companies will offer 0% for 12 months with a 3% balance transfer fee subject to a maximum of $75 (or something like that). Although in the last 6 months, many of the credit card companies have started lifting their maximums on balance transfer fees effectively negating any deal on those cards. I am not advocating this strategy to anyone, however if you are able to find a credit card that will provide you with 0% interest for 12+ months and $0 transaction charges (or even a $75 transaction charge), then arbitrage can be accomplished. The trouble is being able to find these cards and make timely payments. This only really becomes profitable if you are able to secure large credit lines and can manage your outstanding balances, payments, etc.

100% agreed with wanderingcfa. In order for the credit card arbitrage to work you need the following: - a risk-free rate (CD) higher than the credit card’s balance transfer fee - enough cash in your checking acct to cover the minimum monthly payments - an automated online payment system (checkbooks cost $25, making each paper check $0.50 or so) As recently as 2 years ago Citibank offered such a card (Professional, 0% balance transfer for 12 months) and 1Y CD rate of 5%. With a $10K limit and if you did everything right you stand to make a little less than $500 (subtracting opportunity cost of your monthly payments) in a year. Gone are those days.

lxada269 Wrote: ------------------------------------------------------- > Alright, I have a plan: > > Everyone max out your credit cards and send the > money to me. I will invest the money in a risk > free investment (I promise) and send you your > principal back and most of the interest. You will > not have to do any work*, and get free money. > > I will achieve economies of scale. Send all money > to… > > *I will charge a small fee I need to get my reward flying miles back too. These will be returned, right?

Not outside the US. UK interest rates are 5.25%. Australian rates are 7.25%. gz2nyc Wrote: ------------------------------------------------------- > 100% agreed with wanderingcfa. In order for the > credit card arbitrage to work you need the > following: > > - a risk-free rate (CD) higher than the credit > card’s balance transfer fee No problem. Virgin are doing 15 months 0% with 2.98% fee. That’s cheap money. Or you just spend on a 0% purchase card (12 months) > - enough cash in your checking acct to cover the > minimum monthly payments Sure, but outside the US, “checking accounts” pay interest. I get 5% on my current account at the moment. So there’s not too much cost there. > - an automated online payment system (checkbooks > cost $25, making each paper check $0.50 or so) A) cheques are free in the UK, and I have all my bills settled by Direct Debit automatically. You can use BPay in Aus. > As recently as 2 years ago Citibank offered such a > card (Professional, 0% balance transfer for 12 > months) and 1Y CD rate of 5%. With a $10K limit > and if you did everything right you stand to make > a little less than $500 (subtracting opportunity > cost of your monthly payments) in a year. > Gone are those days. Only in the US. But you won’t get rich doing it. As I said before, it’s not worth the balance transfer hassles, but if I have a large purchase to make (like Christmas flights to Aus - £2,500 economy!!!) then I’ll stick it on a new 0% on purchases card. It just cuts the PV cost of the flights to £2350.