They say a picture speaks a thousand words. So, here is a picture of my bank statement showing the passive income from credit card arbitrage in the short span of 9 months. I had mentioned earlier about my first attempt at credit card arbitrage. Well, the CD came due on the 1st of June and we made around $2,000 in free money (The picture does not show the interest payment for the last month).
If you are new to credit card arbitrage, here’s a quick and dirty explanation of how it works: Remember those 0% balance transfer offers you receive in your mail box every day? Well, you accept the offer and park the money in a safe place and earn interest on it. That’s all there is to it. But wait! Before you head off and take on a pile of debt, here are a few questions you should ask yourself to determine if you are suited to play this game.
- Are you organized enough to make the monthly payments on time?
- Are you disciplined not to use the money for anything else?
- Do you have plans for taking any large loans in the near future?
- Can you control the spending you charge to your credit card?
- Will the “debt” bother you?
- Do you have a good credit score?
- Can you keep learning without getting complacent or bored?
This one is the most important requirement if you want to play this game. If you are not an organized person and have a history of missing payments, you must stop reading right now and forget that you ever heard about credit card arbitrage! See, here’s how it works. When the credit card company makes you that offer, they add a clause that if you ever miss a payment, you have to give up your first born to life long indenture to the credit card companies. Well, not quite, but close enough. Your interest rate will jump up suddenly from 0% to possibly in excess of 20% depending on the kind of card you carry. So, if you are not organized to stay on top of things all the time then this game is not for you. Sorry.
Even the best laid plans can go wrong. No matter how organized you are, there is a remote possibility that things will stray off track during that one fateful month. Or, the credit card companies may just decide to change the rates for no reason whatsoever – yes, they can do that. So, you should, at all time, be able to pull the money out and repay the credit card within on a short notice within a short time frame. That means that you should have easy access to the credit card money – every day, all the time. If you have a weakness for gambling or are addicted to investing or have a business that is constantly in need of money or any other temptation to use that money, and you lack the discipline to not give in to the urge, then please, do yourself a favor and stay away!
Some call the debt incurred through credit card arbitrage as “good” debt since the money borrowed works very hard to make more money for you. But call a debt by any name, it is still debt. So it will lower your credit score temporarily and it will look bad on any future loan applications you make. So if you plan on buying a car through financing or applying for a mortgage in the future, stay away from the balance transfer game until after you are done with your other loans. I have heard people say that your credit score will bounce back after you repay the money borrowed through balance transfer and in fact your credit score could increase due to reduced overall utilization. But I would not take any chances. We did not get into the 0% balance transfer game until we had already secured our mortgage and locked in a low fixed rate.
One of the not-so-well-known rules put forth by credit card companies is that any payment you make will always be applied to the lowest interest balance first. What that means is, if you have a credit card with 0% APR on balance transfer and 10% APR on purchases, any monthly payment you make will be applied to the balance transfer amount. Say if you have transferred a balance of $10,000. And you forget and use the same card for purchases, say for the amount of $1000. Then any payment you make will apply to the $10,000 balance, while the $1000 balance will be charged an interest of 10% every month until you have paid the balance of $10,000 in full. So you need to keep track of what cards are used for what and never make the mistake of using the card used for balance transfers for purchases.
Like I mentioned before, call credit card arbitrage by any name, but the fact of the matter is that it is “debt”. If it bothers you to carry debt, you should not get into this game. When we started out, the better half and I got into this game together – me with two cards and the better half with one card. With just one or two cards to manage per head, it was not really that bad. While I was excited to be making passive income, the better half was stressed out about carrying debt (I wrote about it in detail here, in case you are interested). So, this game is not for everyone. You need to be able to handle debt if you want to play this game.
This is in a way a game of economies of scale. If you have a low credit score, and have access to only a few thousand dollars in credit, then this game is probably not worth it. Also, if you do not qualify for 0% APR, then it will not be worth it. Earlier (when we used balance transfer offers to consolidate our debt), we had come across several offers with no fees. But these days it seems like most cards charge a balance transfer fee. Until recently, it used to be around 3%-5% of the amount you borrow, capped to anywhere in the range of $30 to $150. But these days, I heard several credit card companies (notably, Citibank?) is removing the cap. So unless you have a large credit line and have the negotiating power to reduce or eliminate the fees, the game will just not pay out enough. And for both large credit lines and negotiating power, you need to have a good credit score.
Credit cards have a lot of bad rap. And for a good reason. They do not offer you a loan with 0% interest out of the goodness of their heart. It is just the candy coating for a very bitter pill inside. The aim of the credit card companies is to lure you and trap you. There are several ways they hope to make money off of you - (a) if you miss a payment you will be slapped with steep rates (b) there are many fees associated with balance transfers (c) if you do not remember to repay the money before the offer period ends, the rate goes up (d) any payment you make will apply for the lowest interest debt first and so on and so forth. If you want to play this game, you should always stay in step with the rules put forth credit card companies. Keep reading and stay informed. The Fat Wallet finance forum is a great place to learn from the experiences of several veterans in this field. If you want to play this game you should be excited by the prospect of playing this game and staying on top of things. If reading about the credit card fine print bores you, you should stay away!
Overall, I would like to stress that this is not a game for everyone. That said, if your answers to the above questions have convinced you at that you are a perfect candidate for this game, then Congratulations! Welcome to ring of lion tamers that have found a way to make the big bad credit card companies purr and dance to our tunes. Here is a good place to start reading about it some more.
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