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If I Were Going to Do Credit Card Arbitrage…

…this is how I’d do it. (see end of post for a zillion disclaimers)

I find credit card arbitrage a scary and overwhelming idea and don’t plan to do it. However, I was recently reading on My Dollar Plan about how she does it with over $200,000. I don’t think I could handle that—so much to keep track of. Plus, she mentioned that if she accidentally goes over her 0% period on the credit cards, she’ll have to pay something like $20-30 a day in interest.

At the same time, I admire her for having all her ducks in a row. I also think that doing this makes a lot more sense if you have a lot of money in play like she does–otherwise it might not be worth the effort. I’ll do some calculations later on to explain why.

I got to talking with Micah about how it works and began to come up with how I’d do it… Supposing that I had $1 mil in available credit and wanted to do this.

Well, I’d probably only take out $200,000 or so for it…because I’d still be nervous. I might go up later, but this is where I’d start to make sure everything worked.

So I’d open, say, 4 credit cards with $50,000 available on each at 0% interest. Or realistically, I might have to open 16 credit cards with $12,500 balances…. I would then use them to fund two $100,000 CD accounts (say at 4.5% interest at two different banks–so as to get the FDIC coverage). I might put it in money market accounts, depending on the rates and whether I was worried about penalties. But let’s just say CDs here, since you’ve got the rate locked-in.

If I couldn’t get the credit cards at 0% interest, I’d also open cards that did 0% balance transfer and immediately transfer the balance to them.

Of course, these good rates only last for a certain period. And as I mentioned above, interest become awful if you keep the balance on them longer!

So I’d set up a spreadsheet with info on each card–its number, bank, balance, and the expiration of its 0% period. I’d check this sheet every week (just pop in and look it over to make sure nothing’s due this week) and, more importantly, set up reminders via Google Calendar for 2 weeks or so before they expired.

I’d have to work out beforehand about how long it took for me to apply and get my application processed and get my card. I’m just putting in two weeks to represent the real number.

2 weeks (or whatever) before each card expired, I’d find another good 0% balance transfer offer (I’d probably be saving all the offers I got), apply, and then transfer the balance a couple days before the 0% period expired on the old one.

Eventually, I’d withdraw the CD and pay off the cards.

One places where this could get tricky for me:

I’d be worried that I wouldn’t be able to get another good credit card in time. Of course, that’s the advantage of having it in a CD. If we were too close to the deadline, I could just withdraw the amount due and pay it off. Of course this would cut my CD’s interest earnings. But that’s better than paying interest on the credit card.

And last–why do I think it’s really only worthwhile if you have a lot of money in play?

If you had $1000 invested in our hypothetical 4.5% CD, you’d have $45 at the end of one year. That’s supposed to cover your effort with getting new 0% cards at the 6 month period, as well as any stress. I just don’t think it’s worth doing that on credit.

$5000? That’s $225. Still a bit low for all the work and stress.

$50,000? At $2,250 we’re getting somewhere.

$200,000? That’s $9,000. I think it’s a worthy return for the effort.

Yes, you could likely get higher returns if you put it in stocks…but what if they fell and you were owing $100,000 to credit card companies? Not cool, even if you transferred it around to avoid interest. Wayy too much risk there.

Conservative is the way to go here.

Of course, this is a thought experiment–I don’t have good credit or the right set of cajones to do this. But it’s interesting to think about!

And now the disclaimers: Mrs. Micah is certainly not a finance professional. If you want to do this, talk to a real finance professional (but only a trustworthy one because there are a lot of losers out there). All investing and borrowing actions are taken at your own risk of course. This is a thought-experiment and while I hope it’ll get you thinking too, I don’t want to encourage people to go into this if they’re not ready. Thanks!

photo by The Consumerist

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Saturday Roundup | Credit Withdrawal
December 22, 2007 at 2:11 pm

{ 7 comments… read them below or add one }

Wooly Woman December 16, 2007 at 12:14 pm

I keep thinking about this too when I get 0% offers for credit cards in the mail, but for smaller amounts. I too am scared I would miss the deadline and be charged interest and it is a lot of work. But you are right, on bigger balances it does seem worth it if you have the guts.

My Dollar Plan December 16, 2007 at 2:14 pm

Glad it got you thinking! It does require organization, but the payoff is worth it. Most of the work is upfront, then it really just runs itself.

RacerX December 16, 2007 at 2:26 pm

Another thing to note:

You will take a massive initial hit on your FICO scores. To the tune of 100+ points potentially. Over the year it will come back up and you might even increase it later, but do not do this if you have ANY major purchases comimng up.

paidtwice December 16, 2007 at 6:34 pm

Don’t forget you have to make your minimum payments on all your debt each month or lose your 0% interest.

That’s the part that does it in for me. It diminishes your returns and is just too much for me to keep track of. Maybe if I made arbitrage my full time job lol.

I only have $100K in available credit, anyway lol

Jon December 17, 2007 at 8:37 am

Yep as paidtwice said you have to keep making payments. I think they’re usually 2% of the balance, aren’t they? So maybe you could put half the money in a money market account and the other half in a high interest CD.

Another possibility is to calculate how much you’ll make in interest and then put that amount in the stock market. Worst case, you lose it and break even overall; best case you make oodles of money!

Laura December 17, 2007 at 11:13 am

I guess I’m not the risk taker I thought I was! I’ll stick with growing our house fund month by month.

mrsmicah December 17, 2007 at 1:13 pm

Ah, good points Jon and PT. I’d probably opt for the Money Market account.

I’m with you, Laura. Even though it seems like this would work, I just don’t have the risk tolerance (or credit score) for it…

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