Pros and Cons of Credit Card Arbitrage

Buying something, and then selling it for a profit, has been around for as long as people have been on the planet. It may have begun with bartering one item for another, but the principle is the same--the transfer of a commodity to another person in exchange for something of value. At times, that person will then attempt to sell the commodity to another person, for a profit, very quickly. Basically, this is called arbitrage. There are forms of arbitrage that people can engage in using their credit cards. Following are a few pros and cons of credit card arbitrage.

Pros

Take Advantage of Low Interest Rates

Financial markets are in a constant state of flux. Interest rates rise and fall, sometimes without any apparent reason. At times, various lending institutions reduce their interest rates to 0% for a short period of time, in order to attract borrowers. It is possible to use your credit card to take advantage of the situation by ‘borrowing’ money on your credit card, and then transferring that money to your savings account. Use the money from your savings account to pay the credit card bill until the interest rates go up, at which time you should repay the entire amount. During the time the money was in your savings account, it was earning interest. In theory, you should have made a profit by collecting interest while paying 0% interest on the ‘loan.’

The More You ‘Borrow’ the Higher Your Profit

If you use a low interest loan for credit card arbitrage, and then collect interest by putting it into a savings account, it stands to reason that the more money your ‘borrow’ the more you’ll make. For instance, if you transfer $1,000 to your savings account as an advance on your credit card, the interest you collect won’t amount to very much. However, if you transfer $10,000,000, the interest could be significant. You may have to use a variety of different cards and accounts for large sums of money.

Borrow to Invest

A form of arbitrage that some people take advantage of is to borrow money on their credit card, and use that money to invest in a ‘sure fire’ profit maker. Basically, it means using your credit card to finance a business opportunity, with the intention of repaying the loan when the interest rates go up. By its very nature, this form of arbitrage is very risky. However, if you have the chance to get in on a money-making venture that has the potential to be extremely profitable, engaging in credit card arbitrage may be a good idea.

Cons

Money Cannot Be Made and Spent Immediately

When lenders offer a 0% interest rate for a loan, they do it because they want to increase their business, which is lending money for a profit. If you hope to take advantage of the offer to make a few bucks yourself, you’ll have to exercise caution and will power. When you transfer money to your credit card, there is an expectation that you’ll be making regular payments to pay off the ‘loan.’ Your plan is to use the very money you borrowed to make those payments. This is where the caution and will power come in--you must refrain from using that money for anything else. If you do tap into it from time to time, your profit margin could decrease to the extent that you would lose whatever interest you’re accruing.

Long-Term Loans Are Necessary to Make a Profit

Simply put, credit card arbitrage is not likely to produce a great deal of profit unless the ‘loan’ is for a long period of time, and for a lot of money--the longer the period of time, and more money that’s involved, the more profit you’d make. Short-term loans for small amounts of money won’t allow your ‘borrowed’ money to reside in a savings account long enough to produce much of a profit. Keep in mind that you’ll need to make regular payments over the course of loan, and if you miss a couple here and there, your loan could be called in.

Credit Card Arbitrage Investments May Fail

If you intend to use your credit card to finance a business opportunity, you will need to have a backup plan. If the business fails to produce a profit in a timely manner, you could end up not only losing the business, but you would still owe the lender for their advance of cash to your credit card. Even with a 0% interest on the ‘loan,’ having to pay the original amount of the cash transfer could present a hardship. A worst case scenario would be defaulting on the loan and severely damaging your credit rating.

Guest post from Riley Finnigan.