Arbitration Follow-UP: Banks May Pay the Price

A couple of weeks ago I talked about mandatory binding arbitration and the fact that this little-known clause was, in essence, a rewrite of consumer rights. Well, I’m happy to report there may be some consequences for the major banks and credit card companies imposing this clause including; Bank of America, Capital One, Chase Bank, and Citibank.

A federal court in New York allowed proceedings to begin on a lawsuit charging some of the nation’s largest banks with conspiring together to force credit card customers into arbitration. If you’ll recall, this meant that consumer’s were required to give up their right to a trial and their right to participate in class-action lawsuits, among other things. The attorney’s of the plaintiffs’ are claiming that the banks broke antitrust laws, which is grounds to immediately nullify the arbitration clause within each of their respective credit card contracts.

The lawyers discovered - while working on different cases, no less - that the banks had formed an “arbitration coalition” in which they had meet at least 18 times. These meetings were designed to hone in on the specific wording that would strip consumers of their rights and somehow make that legal. Furthermore, upon closer examination of each bank’s contract, the clauses were found to be “almost uniform,” according to Merrill Davidoff, lead counsel. The court overturned a lower courts decision dismissing the case by stating there was no grounds for a lawsuit because the evidence was “entirely speculative.”

But, before you get your hopes up and think that you may get some money out of this lawsuit - goodness knows we all probably deserve a little - the lawyers are only seeking an injunction, which means no money is on the line. However, this is a huge step towards victory for consumers because its preliminary results indicate that banks are going to have to face the music on these antitrust charges.

This new turn of events has put the brakes on the Arbitration Fairness Act of 2007 - a bid by consumer activists to squash binding arbitration. However, thanks to some clever lawyering, these contracts may become null and void. It will depend entirely on the ruling, but the possibility exists that consumers could still file class-action suits against the large companies seeking damages during the times they were unable to seek fair justice.

The case was reinstated as of Friday, April 25, 2008. There are still deliberations that will be taking place before the court comes to any specific decision; however, the fact that they are hearing the case means that lobbyists and advocates of consumer rights are making an impact in Washington. With the Cardholders’ Bill of Rights going before Congress and this case before a federal court, the credit card industry may be facing a huge change by year’s end.

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Credit Card Arbitrage: A final word

Remember - if it seems too good to be true, it probably is. Always do your research before committing to anything, since the terms & conditions vary so significantly from card to card. Sadly, some card issuers have become sly to the whole arbitrage game and these days not all of them let you ‘overpay’ or acquire a positive balance. In William’s case, for example, the HillaryCard people may simply refuse to accept ObamaCard’s money, so he should check with both card companies before he makes any rash decisions.

At the time of writing, one major Card issuer that hasn’t cracked down on arbitrage (yet!) is Citibank. They will actually cut you a check for the amount of the balance transfer amount - the idea being that would then use this check to pay off a debt on one of your other cards. An arbitrager would, of course, simply deposit this check into a high yeild savings account and could start earning interest immediately. Because of it’s suitability for stoozing, in arbitrage slang these types of cards  are known as a ‘Super Balance Transfer’ card. If you’re located in the UK, a popular SBT card is the Visa ‘Egg‘.

A word of caution though - Citinank surely knows that by doing this they are leaving the door open for arbitragers, yet they continue to do it anyway. Why? Simply because many (if not most) wannabe arbitragers slip up somewhere along the line and wind up losing their cushy promotional rate. Be advised that you’ll need to always be on your guard - and if you’re not willing to go over your T&C with a fine-tooth comb, credit card arbitrage may not be for you.

You can check out a list of Citibank’s balance transfer cards here.

Finally, remember the 3 golden rules of arbitrage:

1. Always remember to meet the minimum monthly repayments.

2. NEVER use any of your BT cards for purchases (you may even wish to consider cutting them up or packing them away).

3. Make sure you repay the BT card at least one month before your introductory offer expires.

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Credit Card Arbitrage (Pt. 2)

How much can I actually make?

That depends on several factors – your credit limit, the interest rate on the savings account, your minimum repayment requirements, your tax rate, and perhaps most crucially, your credit rating, since this will determine how long you can reasonably expect to keep being approved on 0% balance transfer offers. For most of us, credit card arbitrage won’t bring in more than a few hundred dollars a year, though I have personally heard of some people routinely making 5 figures annually.

So is it a good idea?

That depends. If you’ve got a good track record when it comes to credit cards and you’re willing to take a small to moderate hit to your credit rating, then it’s a good way to make some money with relatively little effort. For the rest of us mortals who forget dates, make impulsive purchases, and occasionally pay their bills late, my advice is to steer well clear.

And if you decide to ignore my advice (it has been known to happen), please, PLEASE take at least some minor precautions, like calling the credit card company and asking them to provide some basic information. At the very least you should find out what the terms and conditions are, and the exact date when your introductory offer expires. Try to get this in writing, but if you can’t it’s still worth noting down the time and date you called and who you spoke to. Whilst it might seem like a pain now, this information will be priceless if they try any funny business in the future.

Finally, and this is critical, make sure you either repay your debt or transfer it over to another card at least a month before your introductory offer expires. It often takes several weeks for credit card companies to process a balance transfer so you should continue to make the minimum repayments until you are absolutely positive you no longer need to.

Come back tomorrow for a final wrap-up on Credit Card arbitrage as well as some ad-free, objective product recommendations if you think you’d like to give it a shot.

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The wonderful world of Credit Card Arbitrage! (Pt. 1)

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!

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