Balance Transfer Arbitrage

Disclaimer:  The following information is merely an explanation of a money saving technique commonly referred to as balance transfer arbitrage.  It is by no means an endorsement of this technique and should not be constituted as financial advice.

As you can tell from the above disclaimer, balance transfer arbitrage is a money saving technique that is not without drawbacks.  Here, we will discuss the premise, the process and the risks of this strategy.

First, lets begin with the tools:  a 0% APR balance transfer offer, credit card debt and money in the bank (yes, money in the bank!)  For this example, we’ll assume credit card debt of $10,000 on a single card and a the same amount in cash.  To start the process, a person transfers the $10,000 to a credit card offering a 0% APR on balance transfers for 1 year and charges a maximum balance transfer fee of $75.  (You can compare these offers in the balance transfers section of this website.)

Once you set up the balance transfer, open up a high yield savings account.  While rates are down substantially over the past year, it is still possible to find one that offers an interest rate in the mid to high 3% range (see http://www.bankrate.com/brm/rate/deposits_home.asp for current rates).  Now, deposit your $10,000 into the high yield savings or money market account. 

Over the course of a year, you’ll earn around $300-$350 in interest, depending on your interest rate, while paying no credit card interest.  During the course of the year, make your minimum monthly payments to the credit card (obviously) and be sure to keep your savings in the bank.  At year’s end, taking balance transfer fees into consideration, you’ll have an extra $275 after paying off your debt.

And, while the taxman will want a bite out of your savings, it is still $275 you can create by spending a half hour online. 

Balance transfer arbitrage doesn’t have to end after one year.  There are plenty of credit card companies willing to lend to consumers with good credit.  (At least, they have been in the past)  However, don’t count your chickens until the eggs hatch.  Yet, if you can transfer your balance to another 0% card, there’s no reason not to.  Keep you money in the bank, let the interest pile up, and gradually pay down your debt while earning a modest income on cash you’d otherwise have no access to.

To review credit card candidates, visit the 0% APR section of Smart Credit Choices to compare credit cards to use for balance transfer arbitrage.