Author Topic: Credit Card Arbitrage  (Read 9866 times)

Little House

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Credit Card Arbitrage
« on: June 06, 2014, 07:57:36 AM »
Alright, Mustachians - What are your thoughts on credit card arbitrage? This is where you borrow money at 0% APR for x amount of months and invest it to make money off of borrowed money at 0 interest (Minus the initial 3% paid for a balance transfer of sorts).

Go!

hexdexorex

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Re: Credit Card Arbitrage
« Reply #1 on: June 06, 2014, 08:24:05 AM »
Where can you get a guaranteed risk free investment above 3%? If you cant I wouldn't do it.

blackomen

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Re: Credit Card Arbitrage
« Reply #2 on: June 06, 2014, 08:45:47 AM »
This is not worth the trouble at the current interest rates.  A much more effective idea is getting cards with big sign-in bonuses, getting those bonuses, and cancelling the card before they charge an annual fee.

Mississippi Mudstache

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Re: Credit Card Arbitrage
« Reply #3 on: June 06, 2014, 08:49:59 AM »
This is not worth the trouble at the current interest rates.  A much more effective idea is getting cards with big sign-in bonuses, getting those bonuses, and cancelling the card before they charge an annual fee.

Most definitely.

God or Mammon?

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Re: Credit Card Arbitrage
« Reply #4 on: June 06, 2014, 09:16:59 AM »
This is not worth the trouble at the current interest rates.  A much more effective idea is getting cards with big sign-in bonuses, getting those bonuses, and cancelling the card before they charge an annual fee.

it's a fantastic idea for anyone who has debt - free money if one is diligent and disciplined

frugaliknowit

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Re: Credit Card Arbitrage
« Reply #5 on: June 06, 2014, 09:40:53 AM »
Fahgedabouit!!  With the 3% fee, and our current interest rate environment, find something better to do with your time!

catccc

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Re: Credit Card Arbitrage
« Reply #6 on: June 06, 2014, 10:28:50 AM »
I agree with a lot of the other responses.  The heyday for this has passed.  Not that it won't come again, but now is not the time.

Jamesqf

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Re: Credit Card Arbitrage
« Reply #7 on: June 06, 2014, 11:20:32 AM »
Be careful.  A key component of the credit score is the average age of your credit accounts.  So if you've had one account for say 5 years, and then you introduce a bunch of new accounts (newborn babies??), then that average age of accounts could drop precipitately - and that will affect your score. 

But why should I care about my credit score?  At least as long as it's high enough to keep on getting the 0% interest cards.

I've actually been doing this, in a fairly small way, for several years.  (Pretty much since I started seeing 0% interest rate cards.)  I don't roll over balances, unless I find a card (Chase's Slate is the only one I know of) that has a no-fee balance transfer.  I simply put all my normal spending on a card, and make only minimum payments for the 0% period.  Meanwhile the money I would have paid goes into the mutual fund accounts.  At the end of the period, I pay the card off, and get a new 0% one.

I figure this has averaged out to an interest-free loan of about $8K, over a period where the market has gone up well over 25%.  So $2K profit there, plus 1-5% cash back and several hundred in signup bonuses.

hexdexorex

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Re: Credit Card Arbitrage
« Reply #8 on: June 06, 2014, 12:39:27 PM »
Be careful.  A key component of the credit score is the average age of your credit accounts.  So if you've had one account for say 5 years, and then you introduce a bunch of new accounts (newborn babies??), then that average age of accounts could drop precipitately - and that will affect your score. 

But why should I care about my credit score?  At least as long as it's high enough to keep on getting the 0% interest cards.

I've actually been doing this, in a fairly small way, for several years.  (Pretty much since I started seeing 0% interest rate cards.)  I don't roll over balances, unless I find a card (Chase's Slate is the only one I know of) that has a no-fee balance transfer.  I simply put all my normal spending on a card, and make only minimum payments for the 0% period.  Meanwhile the money I would have paid goes into the mutual fund accounts.  At the end of the period, I pay the card off, and get a new 0% one.

I figure this has averaged out to an interest-free loan of about $8K, over a period where the market has gone up well over 25%.  So $2K profit there, plus 1-5% cash back and several hundred in signup bonuses.

I mean its fine if you understand the risk. If the market went down 25% you would have to pay back that much...but as long as your emergency fund is large enough you can do it. I personally dont like using borrowed money for any kind of risky investment.

Back in 2007 you could borrow from credit cards for 1 year interest free with no fee....then put into bank accounts like WAMU and FNBO for 5% interest....that was when this was a great deal.

chucklesmcgee

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Re: Credit Card Arbitrage
« Reply #9 on: June 06, 2014, 07:11:00 PM »
A far more profitable venue is manufactured spending with credit cards. Basically involves purchasing near-cash equivalents with a credit card that are considered ordinary purchases, then converting them into something that can be used to pay off the card in the grace period, allowing you to rack up rewards.

For instance, I purchase  $2000 Visa Vanilla Prepaid Gift Cards at CVS with a card that gives 5% back at drug stores. Each $500 card carries a $4.95 fee. I then purchase 2 $999.30 money orders at Walmart using the cards (minus a $0.70 fee for each money order) using the gift cards. I deposit the money order in my bank account to pay off the card. $100 in cash back rewards- $19.80 in giftcard fees - $1.40 for money orders= $78.80 returns on an interest-free loan of $2000= 3.94% returns per go- way more profitable than any guaranteed investment is going to give you in a year.

Obviously there's a hassle in the hustling, the costs of your time, etc., but if you already find yourself in CVS and Walmart semi-regularly the marginal cost of this is basically zero. A couple grand a month isn't going to attract the ire of card companies.

RootofGood

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Re: Credit Card Arbitrage
« Reply #10 on: June 06, 2014, 07:59:40 PM »
I did this for a while when banks paid 5%+ interest.  And many CC's offered 0% BT fees.  At my peak, I had well over $100k borrowed on credit cards.  That translated to $5000+ per year in free money from the arb game.

Eventually I had trouble opening new CC accounts because my credit utilization was too high.  I guess I looked risky to the CC companies, so one of them (citicards IIRC) started offering me big time discounts off the account balance if I would repay them in full.  Like 20-40% off IIRC.  So I could settle my account balance of $4000 for $2400 or $3200.  So I made another quick $1000 here and there.  They structured it in such a way as to not be forgiveness of indebtedness (which would trigger a taxable event).

I have credit cards that offer 0% on purchases for 12 months, but at interest rates of a percent or two, it's hardly worth keeping track of a few thousand here and there.  Especially if I mess up and end up owing 14% or more for a month or two. 

rmendpara

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Re: Credit Card Arbitrage
« Reply #11 on: June 06, 2014, 09:26:57 PM »
A far more profitable venue is manufactured spending with credit cards. Basically involves purchasing near-cash equivalents with a credit card that are considered ordinary purchases, then converting them into something that can be used to pay off the card in the grace period, allowing you to rack up rewards.

For instance, I purchase  $2000 Visa Vanilla Prepaid Gift Cards at CVS with a card that gives 5% back at drug stores. Each $500 card carries a $4.95 fee. I then purchase 2 $999.30 money orders at Walmart using the cards (minus a $0.70 fee for each money order) using the gift cards. I deposit the money order in my bank account to pay off the card. $100 in cash back rewards- $19.80 in giftcard fees - $1.40 for money orders= $78.80 returns on an interest-free loan of $2000= 3.94% returns per go- way more profitable than any guaranteed investment is going to give you in a year.

Obviously there's a hassle in the hustling, the costs of your time, etc., but if you already find yourself in CVS and Walmart semi-regularly the marginal cost of this is basically zero. A couple grand a month isn't going to attract the ire of card companies.

This is probably the best/safest return available. Hopefully risk free rates go up soon (higher savings accounts, CDs, money markets, etc), then you could apply this strategy and invest as normal afterwards with an extra ~3.9% on the front end.

Unfortunately, it is a decent amount of effort unless you do live close to a CVS and Wal Mart (or go there anyway), and have that kind of time on your hands.

fishingman88

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Re: Credit Card Arbitrage
« Reply #12 on: June 07, 2014, 04:38:22 AM »
Be careful.  A key component of the credit score is the average age of your credit accounts.  So if you've had one account for say 5 years, and then you introduce a bunch of new accounts (newborn babies??), then that average age of accounts could drop precipitately - and that will affect your score. 

But why should I care about my credit score?  At least as long as it's high enough to keep on getting the 0% interest cards.

I've actually been doing this, in a fairly small way, for several years.  (Pretty much since I started seeing 0% interest rate cards.)  I don't roll over balances, unless I find a card (Chase's Slate is the only one I know of) that has a no-fee balance transfer.  I simply put all my normal spending on a card, and make only minimum payments for the 0% period.  Meanwhile the money I would have paid goes into the mutual fund accounts.  At the end of the period, I pay the card off, and get a new 0% one.

I figure this has averaged out to an interest-free loan of about $8K, over a period where the market has gone up well over 25%.  So $2K profit there, plus 1-5% cash back and several hundred in signup bonuses.

I mean its fine if you understand the risk. If the market went down 25% you would have to pay back that much...but as long as your emergency fund is large enough you can do it. I personally dont like using borrowed money for any kind of risky investment.

Back in 2007 you could borrow from credit cards for 1 year interest free with no fee....then put into bank accounts like WAMU and FNBO for 5% interest....that was when this was a great deal.

Agreed...those WAMU days were amazing. 

To the OP:  If you have a No-Risk to very very very low risk opportunity, then I don't see the problem.  I used Chase's Slate offer to make a "guaranteed" investment and it was well worth it.  Purchased $5000 of product and sold for $8000.  Pre-tax profit was $3000.

I am highly against people using the balance transfer offers to invest though personally.  It is just too risky IMO.  If you were in a position to lose that much money, then putting up your own money would make the most sense. 

 

Jamesqf

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Re: Credit Card Arbitrage
« Reply #13 on: June 07, 2014, 11:50:09 AM »
I mean its fine if you understand the risk. If the market went down 25% you would have to pay back that much...but as long as your emergency fund is large enough you can do it. I personally dont like using borrowed money for any kind of risky investment.

I don't really look at it as borrowing, since what I put on the credit cards is money I would normally spend.  (That is, I'm not taking out cash advances or anything.)  It's just that instead of paying it 'now' (when I make the purchase), I get to keep the cash for months/years, and collect any profit.  I'm also in a position where ongoing income is sufficient to pay the card balances as they come due.

At the same time, I suspect you'd agree that, if you had plans to apply for a home loan, then you would care about your credit score.
 

Sure, but I don't :-)  I also have a couple of accounts going back 15 years or more, so that keeps the average account age up better than if I

brooklynmoney

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Re: Credit Card Arbitrage
« Reply #14 on: June 07, 2014, 08:07:39 PM »
I used to do this, but that was back when they didn't charge the 3%. Now it's not worth it.
I like using arbitrage strategies though. I'm thinking of taking out a HELOC that's fixed at 2.5% to pay off part of my mortgage which is at 4%. The only thing stopping me (besides liquidity concerns) is that the interest on the HELOC isn't deductible for me because I am subject to the AMT. Blech. I loathe the AMT.

blackomen

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Re: Credit Card Arbitrage
« Reply #15 on: June 07, 2014, 11:00:07 PM »
A far more profitable venue is manufactured spending with credit cards. Basically involves purchasing near-cash equivalents with a credit card that are considered ordinary purchases, then converting them into something that can be used to pay off the card in the grace period, allowing you to rack up rewards.

For instance, I purchase  $2000 Visa Vanilla Prepaid Gift Cards at CVS with a card that gives 5% back at drug stores. Each $500 card carries a $4.95 fee. I then purchase 2 $999.30 money orders at Walmart using the cards (minus a $0.70 fee for each money order) using the gift cards. I deposit the money order in my bank account to pay off the card. $100 in cash back rewards- $19.80 in giftcard fees - $1.40 for money orders= $78.80 returns on an interest-free loan of $2000= 3.94% returns per go- way more profitable than any guaranteed investment is going to give you in a year.

Obviously there's a hassle in the hustling, the costs of your time, etc., but if you already find yourself in CVS and Walmart semi-regularly the marginal cost of this is basically zero. A couple grand a month isn't going to attract the ire of card companies.

Manufactured spending, by definition, is a form of arbitrage.  But to crank out a worthwhile amount of points would certainly risk your relationship with the bank that serves your card.  I'd only engage in this if either:

A. You've come close to needing a certain number of miles for a flight ticket and just need those few thousand points quickly.

Or

B. You're broke, unemployed, and need the cash from manufactured spending to keep a roof over your head and food on the table (yes, that was me in 2009 but I didn't think manufactured spending was a viable option to make money in desperate times back then..)

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Little House

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Re: Credit Card Arbitrage
« Reply #16 on: June 09, 2014, 12:07:26 PM »
Some great responses here. I think I need to clarify that the 3% is a one time transaction fee with a 0% APR for 18 months. I know that some people can work arbitrage in their favor, I was just wondering how "mustachian" this was - not very, eh?

As for manufactured spending, I've never heard of this, but it's an interesting idea. Very similar to arbitrage or maybe travel hacking.

My first experiment is under way and it's definitely an experiment.

hexdexorex

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Re: Credit Card Arbitrage
« Reply #17 on: June 09, 2014, 12:18:39 PM »
Also you have to consider the 3% will be post tax...will as any % you earn from your arbitrage will be pretaxed...so might need to make at least 4.5% to break even...

Little House

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Re: Credit Card Arbitrage
« Reply #18 on: June 10, 2014, 11:22:48 AM »
Good point on the taxes - I hadn't computed those in. If I can profit more than the $225 I'm paying at the 3% one time fee over 18-months I'll be thrilled. Again, an experiment. :)