It can be tough to turn down an easy money opportunity — and that’s what credit card arbitrage seems to offer investors. But in reality, the strategy, which involves borrowing money with a 0% or low-interest credit card and then putting that money into an investment that earns a higher rate of return, does carry some risks. And it isn’t necessarily a good fit for average investors.
If you’ve heard of credit card arbitrage and wondered if it’s something you should try, read on for a rundown of the risks and rewards — and what this seemingly “free” strategy could ultimately end up costing you.
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What Is Credit Card Arbitrage?
Let’s say you’re a savvy kid with your eye on making a buck. You see a bicycle for sale at a price that seems too good to be true. So, you borrow some money from your big brother and promise to pay him back a little each week (without interest, because he’s a good guy), and you buy the bike at the bargain price.
You ride around on the bike for a while, and pay your brother every week. You then turn around and sell that bike for twice what you paid — you give your brother the amount you still owe him and pocket the difference.
With credit card arbitrage, or balance transfer arbitrage, the idea is basically the same. You sign up for a credit card with a low or 0% annual percentage rate (APR). Then, you use that credit card account to put money into an investment that will earn more than the interest rate you’re paying on the credit card balance you’re carrying.
You follow one of the basic credit card rules of making at least the minimum payment each month. When the card’s introductory rate expires, you take the money you need out of the investment, pay off the remaining balance on the card, and keep the difference as your profit.
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Credit Card Arbitrage Strategies
What you decide to invest in using a credit card may depend on a few different factors. This includes how much you can borrow, the length of your introductory rate (which is usually six to 18 months), and your tolerance for risk.
Some possible investments for your credit card arbitrage strategy include a high-yield savings account, a certificate of deposit, and short-term bond ETFs.
High-Yield Savings Account
A high-yield savings account may be a good option for risk-averse investors attempting credit card arbitrage. You can’t lose the money because it’s protected at banks by the Federal Deposit Insurance Corporation (FDIC) and at credit unions by the National Credit Union Administration (NCUA). However, you may have to keep a minimum balance to avoid a monthly service fee.
An alternative to attempting credit arbitrage using a high-yield savings account might be to save using an online-only financial institution. Online banks tend to offer more competitive rates than brick-and-mortar banks.
Certificate of Deposit
Another investment with limited risk is a short-term (six months to a year) or no-penalty certificate of deposit, or CD. A CD may offer a higher interest rate than a savings account, and it also will be insured by the FDIC.
The benefit of a no-penalty CD over a short-term CD is that if you find a higher return elsewhere, you can withdraw your money and move it without paying a fee. Otherwise, you’ll face an early withdrawal penalty if you try to take your money out of a CD before the term is over.
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Short-Term Bond ETFs
A bond exchange-traded fund (ETF) that holds short-term bonds may be another low-risk option to consider. Bond ETFs are traded on the stock market, so they’re more liquid than other types of bonds and bond funds. And funds that have a shorter term are less exposed to changing interest rates.
Still, if you’re unfamiliar with bond ETFs, you may want to take some time to research the pros and cons of this investment — including the potential for loss and how to reduce trading costs.
Pros and Cons of Credit Card Arbitrage
As mentioned, there are definite downsides to credit card arbitrage. However, there’s the potential for gains, too. Here’s a quick rundown of the pros and cons of credit arbitrage:
| Pros | Cons |
|---|---|
| May be an easy way to make money if you can find the right investment | Difficult to find a safe investment that makes the strategy worth the effort and risk |
| A low-interest card with cash-back rewards or points could add to the strategy’s benefits | Consequences for late payment could eat into expected profit |
| Making timely payments could help your credit score | Taking out a card and using up your available credit could negatively affect your credit score |
The upside to using credit card arbitrage is the potential to make some extra money with very little effort. If you’ve worked hard to earn and maintain a credit score that qualifies you for a credit card with a 0% or low-interest rate, you can use that card to fund an investment and, if all goes well, quickly pocket a profit.
If you choose a credit card that offers credit card rewards, such as cash back or points, that could be an added benefit. Further, by always making at least the minimum payments on the credit card and repaying the balance on time, you might help build your credit score. (Although if you qualify for a low-interest card, you probably already have good credit.)
Unfortunately, there are also plenty of downsides to credit card arbitrage — starting with finding an investment that works well with the strategy. Though in recent months the Federal Reserve has been bumping up its benchmark interest rate, it may take a while before those increases lead to noticeably higher yields on savings accounts and CDs.
Depending on how much you decide to borrow and how long your introductory period lasts, the small amount you might earn from your investment may not be worth the effort or risk of using your credit card.
And there are risks involved with credit arbitrage. For starters, you can expect to feel some effects if you make a late payment on your card. You might have to pay a late fee or, worse, the credit card company could cancel your promotional interest rate and immediately begin charging a substantially higher interest rate on the account. That could take a significant bite from your profits.
Your credit score also could suffer — even if you make timely payments. Just opening a new line of credit may temporarily lower your score. And if you borrow all or a large portion of your available credit, it could affect your credit card utilization ratio, which also can negatively affect your credit score.
You also can expect your credit score to go down if you do end up making a late payment (or payments). Payment history is the No. 1 factor in determining your FICO Score.
Considering Credit Card Arbitrage? What to Know
There’s an old saying in investing: Don’t risk more than you can afford to lose. Or, as your mom might put it: Just because you can doesn’t mean you should.
Credit arbitrage may look like an easy and “free” way to make some extra money, but it’s a strategy that’s probably best left to investment professionals. If you do decide to attempt it, here are a few things you can do in advance to protect yourself:
• Have a backup plan. What would happen if you suddenly lost your job or had unexpected expenses from an illness or accident? Unless you have a healthy emergency fund or your investment can be easily liquidated, you could quickly run into financial trouble.
• Make sure you understand the terms of your credit card agreement. How long does the introductory period last? (The longer the better.) What happens if you miss a payment? What’s the rate when the promotional period expires?
• Know yourself. This strategy requires using a credit card responsibly. If you aren’t clear on how credit cards work or think you’ll be tempted to use your card for a spending spree instead of investing, you may want to think twice before moving forward.
• Don’t forget about fees. Run the numbers to be sure your investment will still pay off after you cover fees and other costs.
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Other Ways to Save and Make Money Using Your Credit Card
If the concept of credit card arbitrage is new to you, it may be because there are other popular ways to use a credit card to save and make money. Here are some other options to consider.
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Earning Cash Back
With a cash-back rewards card, cardholders can get back a percentage of the money they spent on purchases during a billing cycle. That percentage varies from one card to the next — and there also may be different ways you can receive your cash rewards. You may be able to apply the cash directly to your balance, put it toward gift cards or charitable giving, or have the money deposited directly into your checking account.
Getting cash-back rewards can be an especially effective strategy if you use your card for frequent and/or major purchases and pay down your balance every month.
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Earning Rewards Points
Some card issuers offer a rewards program based on credit card points. Cardholders may be able to put their points toward multiple purposes, including travel (flights, hotels, car rentals), statement credits, cash back, and more. The value of points may vary depending on the specific credit card as well as how you opt to redeem earned points.
Investing Your Rewards
You also may be able to invest with credit card rewards. For instance, if you earned cash-back rewards from your credit card spending, you could redeem your rewards as a direct deposit or check. Then, you could use that money to invest with credit card rewards basically — either in a literal investment, such as stocks or index funds, or even in yourself, through additional job training or classes.
Shopping Online to Earn Bonus Rewards
Some credit cards offer bonus rewards for shopping online or through an app. Card issuers may have different rules for their rewards (think goods instead of services, or certain brands only) so it’s a good idea to check out a rewards program’s requirements before signing up.
Using a Balance Transfer Card to Pay Down Debt
Another possibility is to use a no-interest balance transfer credit card to pay down debt. Once you move your balance from a high-interest card to the new card, you’ll have several months to pay down your debt without accruing any additional interest.
Just as with credit card arbitrage, it’s important to be sure you make your monthly payments on time, though, or you could see a big jump in your card’s interest rate. Also keep in mind that a balance transfer fee will apply, so be sure to factor that into the equation.
Using a 0% APR Card
Planning to take a dream trip or make a major purchase? A no-interest credit card could allow you to finance your big spend without accruing interest. You’ll just want to make sure you can pay off the balance within the promotional period, and make your payments on time.
The Takeaway
You may have heard credit card arbitrage, or balance transfer arbitrage, touted as an easy way to make some extra cash. But the process, which involves using a no- or low-interest credit card to finance an investment that earns a higher rate of return, isn’t as simple as it may seem. It can require careful planning, financial savvy, and some research to find the right investment for this strategy. And even if all goes well, the payoff may not be worth the time and effort.
There are other, more proven, ways to save or invest using a low-interest and/or rewards credit card. When you get a credit card through SoFi, for example, your cash-back rewards are worth more if you use them to pay down an eligible SoFi loan, deposit as cash in your SoFi Checking and Savings account, or add to your SoFi Invest account. And because SoFi is always working to keep costs low, members don’t have to worry about losing money to high fees.
FAQ
Are there risks involved in credit card arbitrage?
Yes. Even if your investment seems super safe and like it won’t lose money, if you don’t make your monthly payments on time, or if you can’t pay off the balance before the promotional period is up, you could find yourself in a financial bind.
Is credit card arbitrage legal?
Yes. But just because you can do it doesn’t mean you should. There are other more proven ways to save and invest using a credit card.
How much can you make with credit arbitrage?
The amount you can make using credit card arbitrage depends on several factors. This includes how much you choose to borrow and invest, your card’s interest rate, how much your investment pays, the length of your card’s promotional period, and the fees you might incur when investing.
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