Credit Card Arbitrage Doesn’t Work

A lot of people who consider themselves financially sophisticated have been engaging in a rather peculiar practice which has enabled them to get in essence free money by making use of 0% APR credit cards and high-yield savings accounts. It’s been an issue of great controversy among the personal finance community on the internet, and after much deliberation and contemplation, I’ve decided that the 0% APR balance transfer game isn’t worth playing, and here’s why.

For the uninitiated, credit card arbitrage or the “balance transfer game” is where people sign up for a number of credit cards with introductory offers that have interest rates of 0% for a period of time. They transfer this balance to a high-yield savings account earning 5%, make their payments, and when the introductory rate comes to an end, they pay the balance in full and pocket the difference. This seems simple enough and like an easy way to make a few bucks here and there, but when you delve deep down into it, it’s really just not worth our time.

The first problem with the balance transfer game is that you are for all intensive purposes walking a tight-rope. If you do everything exactly right and don’t miss the slightest thing, you could come out alive, but there are so many things that could go wrong. You could accidentally forget to make a payment, end up paying a balance transfer fee you didn’t see, pay unintended interest because of the way that the credit card company calculates interest. You could find yourself in an emergency and end up using that savings up and find yourself with high-interest credit card debt. Your variable high-interest savings APR could decrease. There’s also the possibility that the credit card company “lost” your payment and you end up paying a late fee, you could have missed something in the fine print. You have to be extremely careful, and if you mess up the slightest thing at all, your whole scheme has failed.

There’s also the damage to your credit score. When you borrow money your debt to income ratio increases. In addition your percent of balance used increases, as well as the number of applications for new credit. Your credit score is going to take a fairly significant hit while you play this game. If you plan on borrowing money for a car, a home, a small business, or anything else during the period of you participating in credit card arbitrage, it’s just not worth it at all.

Even after all of these mitigating factors, you really just don’t end up making all that much money. Let’s say that you got $10,000 on a credit card at 0% for one year. You dotted all of your I’s and crossed all your T’s. Under the best case scenario you made $500 by putting the money in a high-yield savings account. Of course you have to pay taxes on that money, so it’s probably closer to $350 that you actually made. After doing the research on the cards, signing up for a savings account, reading all the fine print, making monthly payments, taking care of the taxes, it’s just not worth your time.

Real wealthy people don’t bother with such games, rather they use their knowledge to invest and create businesses that earn real income of substance. Forbes recently did a survey of the 400 wealthiest people in America, and 75% of them said the best way to build wealth is to become and stay debt free.

Sure you can make a few bucks here and there, but that’s all you’ll make. This is not a road to wealth. A few people win the lottery each year and beat the system, but that doesn’t mean that playing the lottery is a good idea either.