A number of readers have asked me what I think about credit card arbitrage. My personal feeling is that I wouldn’t touch it with a 40 foot pole, but I can’t deny that some people can make it work spectacularly well for themselves. Ultimately it’s a fairly high risk strategy and whether you’ll be able to pull it off depends almost entirely on your level of financial discipline and organization. Here’s a quick breakdown for your perusal:

What is it?

Credit card arbitrage, or ‘stoozing’ as it is sometimes known, is the process of using temporarily free credit to make a short term deposit in a high interest savings account. The initial debt is then repaid or transferred to another 0% balance transfer card shortly before the ‘honeymoon period’ expires, and the arbitrager pockets any interest they’ve made along the way. Sound complicated? Perhaps an example will clear things up:

William – Master Credit card arbitrager

William is approved for an ‘ObamaCard’ – a credit card with a $20,000 credit limit and an introductory 0% balance transfer offer for 6 months. On receiving his new card, he tells the ObamaCard people that, coincidentally, he’s got an outstanding balance of $20,000 on his ‘HillaryCard’ that he’d like them to pay off. As good as their word (and, perhaps more importantly, eager to acquire his debt from their competitors), they quickly transfer $20,000 into his HillaryCard account and correspondingly debit the same amount from his new ObamaCard.

Simple, right? But what the ObamaCard people don’t know is that William doesn’t really have $20,000 in debt on his HillaryCard. In actual fact, being the savvy credit card user that he is, he pays off his bills in full every month and isn’t carrying any debt at all. This means that the folks over at HIllaryCard now owe HIM $20,000, which he can request at any time he likes. In effect, William has scored himself a $20,000 interest free loan for 6 months!

He then opens an account with RomneyBank, who are offering 6% interest per annum in their high yield savings account, and has the HillaryCard people transfer the money they owe him straight into it. George is now earning interest with ObamaCard’s money, and so long as he repays the $20,000 he owes them before the 0% introductory rate expires (either by transferring the money back out of his savings account, or by using another balance transfer offer on a different card) and meets all of their other terms and conditions, he’ll wind up ahead.

Sounds great – What’s the catch?

There are several.

First of all, doing this kind of thing on a consistent basis will bruise your credit score. In the example above, William will have technically ‘maxed out’ his ObamaCard for several months (even though he could theoretically pay it off at any time), and that makes potential creditors quite nervous. The other possibility is that lenders will get wise to what he’s doing and refuse to play along when he tries to transfer his balance to their card – after all, the only reason they offer such competitive rates in the first place is because they expect most people will hang around after the introductory offer ends and wind up paying interest.

The second catch is that should you breach any of the terms and conditions on the offer, the jig is up. The fine print varies from card to card so you’ll need to examine each offer individually, but one thing you should definitely watch out for are minimum repayments. Even though you won’t be charged any interest on your balance transfers directly, you’ll still have to meet certain repayment requirements and missing even a single one usually means the end of your low interest rate. In some cases, you might even get charged interest retroactively – In the example above, if William misses or underpays even a single repayment, he could potentially have to pay fees on the balance he carried prior to losing his introductory rate.

The third catch is that you’ll need to be dead on with your dates and organization.

Come back for the rest tomorrow!

Related posts:

1. Credit Card Arbitrage: A final word
2. Credit Card Arbitrage (Pt. 2)
3. The World’s First Biometric Credit Card
4. Credit Card Review: Discover® More(SM) Card
5. The Credit Card Newbies Guide (Part 2)