Thursday, May 22, 2008

Credit Card Arbitrage

Madison over at My Dollar Plan runs an interesting credit card arbitrage scheme (described here). She basically flips a large number of credit cards from one 0% interest introductory period to another.

As of December last year, she owed $223,000 on her credit cards, but she pays less than $1000 per year in transfer fees. She once got hit with an interest charge, but it turned out to be a mistake that she got fixed.

She puts most of this money against her mortgage and into high-yield savings. After factoring in the balance transfer fees, she comes out ahead about $11,000 per year!

Before reading about this scheme, I would never have thought it was possible. Surely the credit card companies protect themselves against this sort of thing, right? Well, my guess is that almost everyone who tries credit card arbitrage would slip up. From what I can tell, Madison belongs to a very small group of people who could pull this off without mistakes.

It’s not hard to come up with ways that this scheme could go wrong. The most serious of them boil down to some change in the rules set by the credit card companies making it impossible to continue getting 0% interest. If this happens, Madison would have to come up with a large sum of money quickly.

Madison is well prepared for this with large cash savings and room on her home equity line of credit (HELOC). But how many people could resist the temptation to spend at least some of the money? Even if the money is invested in stocks, a stock market drop could make it impossible to cover the entire credit card debt.

Suddenly having to pay 20% interest on a 6-figure sum would be devastating for most people. So, I can’t recommend that anyone try credit card arbitrage. But, I’m impressed that Madison makes it work.


  1. This doesn't really cut the mustard in Canada since such 0% offers are few. Maybe this helps to explain a bit of the credit mess in the US. Get in at 0%, then we'll gouge you later, just like subprime mortgages.

    Anyway, if you do get such a card, read the fine print. Do not use it for purchases if you do a huge balance transfer at 0%. Embedded in all the fine print is how they apply payments to your account. Guess what? Payments go first against the 0% balance transfer. Your purchases on the card thus end up getting stung hard. I know some people who dabbled a bit in this and found out the hard way.

  2. Big Cajun Man: You'd think that credit card companies are aware that some people use Madison's strategy. My guess is that so few people do it successfully that the companies actually make money from the ones who try it, on average.

    Jim: That's a good point about payments going against the balance transfer first. This essentially means that you can't use a 0% transfer card once you get it. Canadians may not have many 0% balance transfer credit cards right now, but whatever the US has usually makes it to Canada eventually.

  3. Madison is a machine!

    You are right that the companies make money on all the non-Madisons who use the zero balance transfers but don't pay off the balance or keep using the card.


  4. Thanks for highlighting my arbitrage strategy! Of course it's taken about five years to evolve into the large sum it is today.

  5. It is not so intelligent to post publicly these schemes on the internet, which is publicly accessible. Need I mention the word public once more.

    It is a good idea, but too many people are posting information on it and eventually these people are going to ruin the entire game. Card companies will simply never offer 0 percent rates again, and they will move it up to 3.9 percent to guarantee that you make not much money at all.

    Also, posting these games online in a BLOG where you can easily be personally identified... like I said not so intelligent at all.

    Most people are sharing their game online because they have an ego problem and must have people KNOWING about their success.

  6. Anonymous: I can't tell if your comment is intended as a threat or if you're concerned about my welfare. In ant case, I think you have analyzed the situation incorrectly. I'm confident that the credit card companies make money collectively from the set of people who attempt credit card arbitrage. A small percentage will make no mistakes and cost the credit card companies money, but the majority will mess it up in one way or another and end up paying large amounts of interest.

  7. I would think the Credit Card Companies would not mind this type of behavior. I doubt there are many people who will master this and most will mess up eventually, and then the credit card company has you paying a high interest rate on a large balance.

  8. Anonymous: As a whole I'm sure the credit card companies don't mind people trying to do this because so many of them would mess up and pay lots of interest. I wonder if there are enough who do it successfully that the credit card companies would want to detect them and try to filter them out. Probably not.