MoneyGen Archives | Page 9 of 96

Q: Do foreign transaction fees apply to online purchases?

Yes. If you’re using a credit card that charges foreign transaction fees, then those fees will apply to online purchases if the merchant is not located in the United States.

Aug

2024

Guide to Credit Card Foreign Transaction Fees

If you’ve used your credit card outside of the U.S. — or simply made a purchase online through a merchant that wasn’t U.S.-based — you may have noticed an extra cost added to your purchase. Called a foreign transaction fee, these charges can add up quickly.

Luckily, it is possible to steer clear of credit card fees for international transactions. Let’s take a closer look at what a foreign transaction fee on a credit card is, how much they typically run, and how you can avoid them.

What Is a Credit Card Foreign Transaction Fee?

A credit card foreign transaction fee is a surcharge, or an additional charge, that some credit cards add to transactions that are processed outside of the U.S. Put another way, it’s a cost that applies for credit card processing when certain conditions are met.

Credit card foreign transaction fees may apply when you make an online purchase from a merchant that’s located outside of the U.S. Additionally, they may apply when you’re using a credit card in another country.

While broadly referred to as a foreign transaction fee, this fee is actually composed of two different charges. One part comes from the credit card issuers and the other is from the credit card network (think Visa or Mastercard, for example).

Recommended: What is a Charge Card?

How Are Credit Card Foreign Transaction Fees Calculated?

To find out how international credit card fees are calculated for your particular credit card, check your card’s terms and conditions. You’ll likely find information on foreign transaction fees in a section titled “Rates and Fees” or “Pricing and Terms.”

In general, however, the amount of your credit card’s international fees is calculated based on a set percentage of the transaction amount.

For example, say your credit card charges a 3% foreign transaction fee, and you’re paying about $50 for souvenirs you bought at a merchant abroad. In this instance, the credit card network may take 1.5% of the transaction, while the credit card issuer would deduct 1.5%. That would result in a total foreign transaction fee of $1.50 for that particular purchase.

Recommended: How to Avoid Interest on a Credit Card

How Much Do Credit Card Foreign Transaction Fees Cost?

Some cards don’t come with credit card international fees, meaning you don’t have to worry about this credit card cost. For cards that do charge foreign transaction fees, this fee can range from 1% to 3% per transaction, with 3% being the average rate.

When this credit card fee for international transactions is charged once, it may not seem like a big deal. But if you make a lot of overseas purchases, it can really add up. If you have a 3% foreign fee credit card, for example, that will tack on $3 for every $100 you put on the card.

Foreign Transaction Fees vs Currency Conversion Fees

A foreign transaction fee isn’t the same thing as a currency conversion fee. Rather, a currency conversion fee is generally one portion of the overall foreign transaction fee you may be charged.

A currency conversion fee is the cost charged by the credit card network to cover the cost of converting funds into the currency of the merchant. So, if you were making a purchase in Spain, the currency would get converted from U.S. dollars to the euro.

Visa and Mastercard charge a 1% currency conversion fee to card issuers. It’s up to the card issuer whether to pass along that fee to the cardholder as part of the overall foreign transaction fee charged — an example of how credit card companies make money.

Spotting Credit Card Foreign Transaction Fees

Aside from looking at the terms and conditions you were provided when you received your credit card, you can look at your card issuer’s website to learn more about any foreign transaction fees. Information is typically listed in the “fees” section. You also could use the search function on that webpage to find any mentions of foreign transaction fees.

Another option is to look at your credit card statement, as issuers must list fees separately on your monthly bill. By reviewing this section of your statement, you’ll see what you’re actually being charged for purchases you’ve made that trigger this fee. Besides, routinely reviewing your credit card statement is a good credit card rule to follow anyways, as it can help you track your spending and notice any potentially fraudulent activity.

When Are Credit Card Foreign Transaction Fees Charged?

Just like every credit card doesn’t charge a credit card annual fee, not all credit cards charge a foreign transaction fee. If yours does, then the credit card issuer will charge them when you’re using your card for purchases made outside of the U.S. This can include when you’re traveling in a foreign country and buying goods and services, or if you shop online with a merchant located abroad.

Tips for Avoiding Credit Card Foreign Transaction Fees

Hoping to steer clear of a foreign fee on credit cards? Here are some ways you may be able to do so.

Find a Card With No Foreign Transaction Fees

The most straightforward way to avoid foreign transaction fees is to simply choose a credit card that doesn’t charge them. Some travel reward cards, for example, list zero foreign transaction fees as a benefit for card holders.

This isn’t limited to travel reward cards, however, and it doesn’t apply to all of them. In other words, you’ll want to make sure to shop around before committing to a card.

Consider an International Credit Card

If you’re a frequent traveler or have a big trip coming up, you may decide to get an international credit card. This will allow you to make purchases and use ATMs in many (but not all) countries around the world. An international credit card also can be helpful if you don’t want to convert U.S. dollars to that country’s currency or use traveler’s checks for your expenditures.

However, some international credit cards do have foreign transaction fees, so check carefully before signing up for one.

Exchange Your Money Before Traveling

You can also avoid foreign transaction fees by exchanging U.S. currency into the native currency for the place(s) you plan to travel. Then, you can simply pay cash for purchases.

Most major banks in the United States will exchange U.S. dollars for the appropriate foreign currency before you travel. They may not have less commonly used currencies available though, so double check before you head to the bank.

You may be able to directly exchange cash at a local bank, or you may need to place an order with a bank online or over the phone. Exchanges may occur the same day, or they may take a couple of days to complete.

If you run out of time, airports will likely have currency exchange services available, either in-person or through a kiosk. Although convenient, the exchange rates are usually less favorable to you than what your bank can offer.

Also keep in mind that carrying cash while traveling can involve risk of loss or theft.

Open a Bank Account With No Foreign Transaction Fees

Another possibility is to open a bank account that allows you to use ATMs without foreign transaction fees or out-of-network fees. Or, you might check to see if your local bank already offers this feature. Some banks have partnerships with financial institutions abroad that can allow you to withdraw funds without paying fees, while others simply reimburse any incurred costs.

Before taking out too much cash, however, keep in mind the potential safety risks of carrying around a large amount of money.

Recommended: When Are Credit Card Payments Due

The Takeaway

Once you know what a foreign transaction fee on a credit card is, you can figure out how to avoid them. At its simplest, a foreign transaction fee is an expense charged by many credit card companies when transactions are made with a merchant outside of the U.S. Not all credit cards charge this fee, so it can make sense to shop around for one that doesn’t if you know you’ll be making these kinds of purchases.

Whether you're looking to build credit, apply for a new credit card, or save money with the cards you have, it's important to understand the options that are best for you. Learn more about credit cards by exploring this credit card guide.

FAQ

Are credit card foreign transaction fees tax-deductible?

In general, businesses (but not individuals) can deduct credit card fees as long as the business can demonstrate that the card was used for business expenses. Check with your accountant for any specific questions.

Do foreign transaction fees apply to online purchases?

Yes, they may. If you’re using a credit card that charges foreign transaction fees, then those fees will apply to online purchases if the merchant is not located in the United States.

Do all credit cards have foreign transaction fees?

No, they don’t. A number of travel cards don’t charge foreign transaction fees, though they’re not necessarily the only type of credit card that doesn’t levy this fee.

Are foreign transaction fees affected by exchange rates?

Typically, foreign transaction fees are based on a predetermined percentage of each transaction. That percentage doesn’t fluctuate when the exchange rate changes.

Photo credit: iStock/Vera Shestak

Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.

Third-Party Brand Mentions: No brands, products, or companies mentioned are affiliated with SoFi, nor do they endorse or sponsor this article. Third-party trademarks referenced herein are property of their respective owners.

Tax Information: This article provides general background information only and is not intended to serve as legal or tax advice or as a substitute for legal counsel. You should consult your own attorney and/or tax advisor if you have a question requiring legal or tax advice.

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Aug

2024

Instant-Use Credit Cards, Explained

After you’re approved for a new credit card, you usually have to wait for it to arrive in the mail before you can start using it. But with an instant-use credit card, as the name implies, you can start shopping immediately.

While not all credit card issuers offer this feature, some issuers share account information with cardholders as soon as they’re approved. Getting a credit card you can use instantly can come in handy if you’re eager to start racking up rewards or spending to secure a sign-up bonus.

What Is an Instant-Use Credit Card?

Instant-use is a feature that some credit cards offer, allowing account holders to use the credit card before they receive a physical card. This is a perk given how long it takes to get a credit card otherwise — usually, cardholders can expect to wait between seven and 10 business days for their card to arrive in the mail.

Each credit card issuer can have unique policies and requirements about using an instant-access credit card. For example, you may not have access to your full credit limit until your physical credit card arrives.

How Instant-Use Credit Cards Work

There are a few different ways that credit cards offering instant use may work. After applying and being approved, you may receive a credit card account number before you get the actual card, which allows you to use the account online. Or, the credit card issuer may provide a temporary instant credit card number or barcode that you can use to make purchases before the official card and number arrives. Note that this differs from virtual credit cards, where the credit card numbers you receive are always temporary and disposable.

In other cases, it’s possible to add the instant-use credit card you’re approved for to a digital wallet, such as PayPal, Google Pay, or Apple Pay. You could then use the card as you’d use other cards in your digital wallet.

Benefits of Instant-Use Credit Cards

The exact benefits of an instant-use credit card depend upon the specific policies of the issuer. Besides providing access to the credit card account more quickly, these cards can offer the following perks.

Faster Rewards Accrual

A key benefit of instant-use credit cards is how quickly you can use them. If a credit card for immediate use features a rewards program, you could start accrue these rewards more quickly, thanks to prompt access to your credit card account. Similarly, if your card offers a lucrative sign-up bonus, you can start spending to earn it that much sooner.

Discounts

Many brands offer discounts to those who get their instant-use credit card. For instance, some retailers may provide a 25% discount on the first purchase you make with the instant-use card. You could use that discount strategically on the largest purchase you’d planned to make in order to maximize this benefit.

Financing Offers

An instant credit card number may offer special financing offers, such as a promotional rate of 0% annual percentage rate (APR) for a designated amount of time. Taking advantage of such an offer can save you a significant amount of money if you pay off your full balance before the promotion ends. Otherwise, the regular interest rate will kick in.

Recommended: How to Avoid Interest on a Credit Card

Drawbacks of Instant-Use Credit Cards

When choosing a credit card, it can understandably seem tempting to get a credit card you can use today. Watch out, though, for the following drawbacks of instant-use credit cards.

Limited Availability

There aren’t that many instant-use credit cards available to choose from. Only a select number of issuers offer them, with some only offering instant access on certain cards. Further, even if you do apply for one of the instant-use credit cards offered, there’s the chance you won’t get immediate access if the issuer encounters any challenges confirming your information.

Initial Usage Restrictions

With some instant-use credit cards, you don’t get immediate access to your full credit limit until you activate your physical card. Instead, when you receive your instant credit card number, you’ll only be able to use a limited portion of your approved credit limit. Especially if you were planning to make a large purchase immediately, this could cap your spending power.

Recommended: What is the Average Credit Card Limit

Potential for Overspending

This can be a downside of any credit card. But with a credit card for immediate use, it can be tempting to run up the balance as soon as you have the account number in hand.

Tips for Getting an Instant-Use Credit Card

If you’re hoping to secure a credit card you can use immediately, here are some tips to keep in mind throughout the process.

Check Your Credit Score Before Applying

Before you move forward with applying — and incurring a dip in your credit score due to a hard inquiry — take a look at your credit score. See if it falls within an issuer’s credit card requirements. If it doesn’t, you might be better off applying for another card you’re more likely to get approved for. Or, you could take steps to improve your credit score before you submit an application, assuming you have the time to do so.

Don’t Skip Researching

If you’re in a rush to find a credit card for immediate use, you might feel tempted to jump on the first instant-use credit card you spot. But don’t let a sense of urgency cause you to skip out on doing due diligence. It’s still important to take the time to compare your options, and to review a credit card’s terms and conditions before you’d move forward with applying.

Remember to Read the Fine Print

When you’re in a rush to get a credit card you can use today, it can seem harmless enough to skip over reading the fine print. However, especially in the case of instant-use credit cards, this can contain some important information when it comes to understanding how credit cards work.

For instance, there may be restrictions on usage of your instant credit card number, such as limited access to your credit limit. If you’d planned to make a massive purchase immediately, you’ll want to know that sooner rather than later.

Tips for Using an Instant-Use Credit Card

If you get approved for a credit card for immediate use, it’s likely you’ll want to start using it as soon as possible. Here are some important tips to keep in mind as you start spending.

Know Your Options for Access

Issuers will provide approved applicants with usage instructions for their instant-access credit cards. The issuer may give you a credit card number that you can then use to make purchases online or using your mobile wallet. If the credit card is attached to a retailer, they may set it up so you can use their app right away with the credit card number they provide.

Don’t Forget to Active Your Physical Card When It Arrives

Even if you’re already off to the races when it comes to spending with your new credit card, don’t neglect your physical card when it does arrive in the mail. Unless you have your card in your digital wallet, an instant-use credit card number limits you to online or over-the-phone purchases. Plus, some issues only offer partial access to your credit limit until your physical card is activated.

Remember That Basic Credit Card Rules Still Apply

Same-day credit cards come with the same set of credit card rules as any other card. Before you get carried away with making purchases, make sure you’re not spending more than you can afford to pay off. You’ll also want to set up a reminder — or even better, auto-pay — to ensure you make timely payments on your new credit card.

Recommended: When Are Credit Card Payments Due?

What to Do If Your Card Doesn’t Offer Instant Access

If you thought you’d applied for an instant-access credit card only to discover it actually isn’t a credit card you can use instantly, you do have options.

For one, you can call your credit card issuer and request rush delivery. Though this likely won’t be as speedy as instant access, it can expedite the mailing process. Just keep in mind that you may owe a fee to cover the cost of faster shipping.
You might also explore a personal loan. Many online lenders offer same-day funding, and the interest rates for personal loans tend to be lower than those of credit cards. Just keep in mind that applying for multiple loans in a short amount of time can affect your credit score. That’s because each application results in a hard inquiry, which will temporarily lower your score.
Lastly, this could be a good time to dip into your emergency fund — especially if you really need fast access to cash. If you do, just make sure to replenish your savings so you’re covered the next time an unexpected expense comes up.

The Takeaway

Applying for instant-use credit cards can come with benefits, including immediate buying power. There are some downsides to consider, though, before making the right credit card choice for your unique needs. For one, you’ll have a more limited selection of cards to choose from, as not all credit card issuers offer instant-use credit cards.

FAQ

Can you use a credit card the same day you get it?

With instant-use credit cards, you can use the card upon approval, which could happen almost instantly. For credit cards that don’t offer instant use, you can typically use the card as soon it arrives in the mail.

How long does it take for a credit card to arrive in the mail?

There are two factors that can impact how long it takes for a credit card to arrive. The first is how long approval takes, which can happen nearly instantly or take up to a week or so. You’ll then have to wait on mailing time, which can take anywhere from five business days up to two calendar weeks.

Can I use my credit card before it arrives?

There are credit cards that you can use instantly, although not all credit cards offer this capability. Some cards require you to wait for the physical card to arrive before you use it. If you have an instant-use credit card, you’ll receive instructions from the issuer on how to start using the account right away.

Photo credit: iStock/Cunaplus_M.Faba

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Aug

2024

What to Do When a Family Member Uses Your Credit Card Unauthorized

By Dan Miller | Credit, credit card, Family Finances | Comments Off

Dealing with unauthorized credit card charges by family members or friends can get complicated. Your credit card issuer may want you to file a police report and even take legal action against the person who made the charges. You’ll have to decide whether it’s worth potentially damaging your relationship with your family member or friend.

One of the main advantages of using a credit card for purchases is that, in most cases, you’re not liable for fraudulent charges. If your card is lost or stolen, usually all it takes is a quick chat with your credit card issuer to resolve the issue. While this likely means you won’t be liable for a relative’s charges made without permission, read on to learn more about managing this scenario.

Authorized vs Unauthorized Credit Card Charges

While you are legally responsible for paying back any authorized credit card charges, in most cases, you will not need to cover any unauthorized credit card charges.

Most credit cards come with a 0% liability guarantee, meaning that you’re not liable for any unauthorized or fraudulent charges that were made with your credit card or account information. This can help protect you against credit card scams and other fraudulent activity, as well as charges made to your card without your permission.

Legal Protection Against Unauthorized Use of Credit Cards

There are two main federal laws that help to protect you against unauthorized use of your credit card or account information:

• Fair Credit Billing Act (FCBA): This law limits your liability for unauthorized credit card charges to $50, though many card issuers lower your liability to $0 for all unauthorized charges.

• Electronic Fund Transfer Act (EFTA): Sometimes referred to as Reg E, this law limits liability for ATM transactions or debit card charges, among other types of transactions, if it’s reported within 60 days.

Recommended: What is a Charge Card?

Tips for Handling Accidental Possession of Credit Cards

One of the best things you can do to help avoid unauthorized use of your credit card by a third party is to keep it in your possession. Make sure you know where your credit cards are at all times, especially if you have teens or other adults living in your home.

It’s also a great idea to regularly monitor your bank accounts and credit card accounts. That way, you can spot any unauthorized charges quickly.

Tips for Handling Unauthorized Credit Card Charges

If unauthorized charges were made to your credit card, here are some tips for how to handle the situation.

Contact Your Credit Card Issuer

The first thing you’ll want to do if you spot an unauthorized credit card charge on your account is to contact your credit card issuer. You can do this by calling the number printed on the back of your credit card or contacting your issuer through your online account.

Request a Refund

As the refund process may vary slightly by issuer, the customer service representative you talk with can help you figure out how to request one. A refund is also sometimes referred to as a credit card chargeback. In many cases, the bank will provisionally credit your account within 24-48 hours while they investigate the fraudulent charges.

File a Police Report

In some cases, your bank or credit card company may request you to fill out a police report. In other cases, the card issuer may file a police report themselves. This can make the situation complicated if it’s a friend or family member who made the unauthorized charges.

Disputing Credit Card Charges

Disputing credit card charges is another term for reporting unauthorized or fraudulent activity on your account. When you dispute a credit card charge, you’re letting the card issuer know that you believe you should not be responsible for paying that particular charge. It’s important to dispute any fraudulent charges as soon as possible.

Reporting Unauthorized Credit Card Use

It’s good financial practice to regularly review your bank and credit card accounts for a number of reasons. One reason is to report any unauthorized credit card use as soon as you see it. The best way of handling fraudulent charges is to report them immediately and then let your bank or credit card company investigate them.

Recommended: How to Avoid Interest On a Credit Card

Tips for Avoiding Credit Card Fraud and Unauthorized Use

There are two things that you’ll want to do to avoid unauthorized use on your credit card:

• First, make sure that you keep track of your cards and don’t leave them where someone else might use them.

• Second, regularly monitor your bank and credit card accounts. That way, you can report any unauthorized use to avoid being liable for any credit card purchase interest charges that may accrue otherwise.

The Takeaway

Federal law limits consumer’s liability for fraudulent or unauthorized charges, and most credit cards have a $0 fraud liability policy. So if you do have any unauthorized or fraudulent charges, make sure to report them to your credit card issuer right away.

Where this situation can get complicated is if it’s a friend or family member who made the unauthorized charge. In the case of unauthorized use of a credit card by a family member or friend, you’ll need to decide whether to try and get the money back directly from that individual or report the charge to your card issuer, which may mean filing a police report.

FAQ

Who is liable for unauthorized credit card charges?

Federal law limits a consumer’s liability for unauthorized credit card charges and credit card fees stemming from unauthorized use. If you see a charge on your credit card account that you don’t recognize, make sure to report it to your card issuer as soon as possible.

How do credit cards investigate unauthorized charges?

Credit card companies have a variety of different ways that they investigate unauthorized charges. They may contact the merchant, review video from the purchase, or check online activity. In some cases, they may work with local law enforcement and/or pursue criminal charges.

Should you report a family member for unauthorized credit card use?

Whether or not you report a family member for unauthorized credit card use depends on the situation. Keep in mind that reporting a family member for unauthorized credit card use may lead to the card issuer pressing charges against them for fraud. So, depending on your relationship, you may not want to report your family member to the card issuer and instead try to get the money back directly from them.

Photo credit: iStock/Erdark

Aug

2024

What to Do With an Old or Expired Credit Card

By Dan Miller | Credit, credit card | Comments Off

If you have an old or expired credit card, you might shred or otherwise dispose of it. Most credit cards come with an expiration date printed on the face of the card alongside the credit card account numbers. If you keep your account open, you’ll usually get a new card in the mail before your previous card expires.

When you get your new credit card or if you’ve decided to close your account, you’ll want to be careful about what to do with your expired credit card. There are a few things to keep in mind to make sure you keep your financial information safe.

Things to Do With an Old or Expired Credit Card

If you have a credit card that’s closed or has passed its credit card expiration date, here are some options to consider as you decide what to do with the card.

Shredding Your Credit Cards

The simplest thing you can do after closing a credit card is to shred it. Most modern shredders have the ability to shred plastic credit cards in addition to paper. If you don’t have a shredder, you can cut your card into multiple pieces with scissors.

You might consider putting each piece of your card in a different trash can or trash bag. This will minimize the chance that someone might be able to reconstruct your full account number.

Disposing of Metal Credit Cards

It gets a little more complicated if you’re disposing of a metal credit card. Most retail shredders will not be able to handle shredding a metal credit card. If you have an expired metal credit card, you can try the following:

• Cutting it up with metal snips

• Turning it in at a physical bank branch

• Sending it back via certified mail to your credit card issuer

Contacting Expired Credit Card Hobbyists

Believe it or not, there are people who collect old credit cards as a hobby. They may do so because they are fascinated by the history of credit cards. While you might not feel comfortable having your credit card and account information in the hands of someone else, if you are, there may be someone who would want to have it.

Just keep in mind that while there are some old or historical cards that have actual value as collectibles, most current credit cards won’t be worth anything to a collector.

Deactivating Magnetic Strips and Chips

As part of the process of destroying a credit card that’s past its credit card expiration date, it’s not just the account number that you’ll need to take care of. Most credit cards have either a magnetic strip or an EMV chip (or both) that contain account information that you’ll need to make sure is destroyed.

If you have a contactless credit card, remember that it also contains potentially sensitive information.

Keeping Your Card Out Of The Recycling Bin

Above all else, don’t just throw your card in the recycling bin. While most credit cards are plastic, that doesn’t mean they can be recycled as-is. Check with your local trash or recycling authority to see if credit cards can be recycled. Even if your card can be recycled, it’s not a great idea to toss it in the recycling bin whole due to security risks.

Things to Do Before You Close Your Credit Card Account

It can be difficult to know when to cancel a credit card due to the implications it can have for your credit score. Especially if the account you’re thinking about closing is one of your older ones, it can impact the length of your credit history. As this is a factor that goes into determining your credit score, canceling a long-standing card could cause your score to drop.

So before closing your credit card account, consider the following options first.

Downgrade Your Card

Instead of closing your credit card account, you might consider downgrading your account to a different type of credit card. Most credit card issuers have a variety of different cards, so you might find one that’s a better fit for you. Plus, keeping your account open can help maintain your average age of accounts.

Recommended: How to Avoid Interest On a Credit Card

Upgrade to an Unsecured Card

If you currently have a secured credit card, you can move from a secured card to an unsecured credit card rather than simply closing out your account.

A secured credit card can make sense if you have a limited credit history or are working on rebuilding your credit history. But once you have an established history of adhering to credit card rules like making on-time payments, you may be able to qualify for an unsecured card.

Recommended: When Are Credit Card Payments Due

Keep Your Card for Small Purchases

It may make sense for you to keep your credit card and use it to make small purchases here and there, especially if it doesn’t have an annual fee. Keeping a credit card open can help you maintain your average age of accounts, especially if the card is one of your older ones.

Just keep in mind that if you do decide to keep it open, you may want to make occasional small purchases on it. Otherwise, your credit card issuer may close it for inactivity.

The Takeaway

If you have an old or expired credit card, it’s important to take the necessary steps to keep your financial information safe. In most cases, it’s a good idea to shred your expired card so that nobody can access your information. You might also just keep your credit card account open to avoid lowering your average age of credit accounts.

FAQ

Can an expired credit card be charged?

In most cases, if you try to make a purchase after your credit card’s expiration date, it will be declined. Keep in mind, though, that merchants may continue to attempt to charge a card after its expiration date if you have it set up for recurring charges. Check with any merchants where you have recurring charges to see how this might affect you.

Can I cancel a credit card online?

Yes, in most cases you do have the ability to cancel a credit card online. You could do so through your online account or possibly by using a chat feature on the card issuer’s website. If you’re not able to cancel your credit card online, you may have to call the customer service number on the back of your card to cancel your card.

What should I do before canceling a credit card?

Knowing when to cancel a credit card is a matter of balancing a variety of different factors. Before canceling a credit card, make sure that it won’t drastically affect your credit score. You’ll also want to contact any merchants where you have recurring charges to update your account information. That will ensure that you don’t have any interruption in service.

Photo credit: iStock/dzika_mrowka

Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.

Disclaimer: Many factors affect your credit scores and the interest rates you may receive. SoFi is not a Credit Repair Organization as defined under federal or state law, including the Credit Repair Organizations Act. SoFi does not provide “credit repair” services or advice or assistance regarding “rebuilding” or “improving” your credit record, credit history, or credit rating. For details, see the FTC’s website .

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Aug

2024

What Is Credit Card Arbitrage and Is It Worth It?

By Kim Franke-Folstad | Credit, credit card, Growing Wealth | Comments Off

Credit card arbitrage is a strategy in which you borrow money with a 0% or low-interest credit card and then put that money into an investment that earns a higher rate of return. It can sound like a way to make easy money, but it 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.

Recommended: Can You Buy Crypto With a Credit Card

What Is Credit Card Arbitrage?

With credit card arbitrage, or balance transfer arbitrage, 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 credit card payment on time 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.

Recommended: When Are Credit Card Payments Due

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 often between 12 and 21 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.

Recommended: How to Avoid Interest on a Credit Card

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 risk and 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 build 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.

Recommended: 10 Credit Card Rules You Should Know

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.

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.

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 to use credit cards in this way.

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 card 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.

Photo credit: iStock/Prostock-Studio

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