February 6, 2005

Credit Card Arbitrage

I did it before, and I'm doing it again.

Use credit cards to make myself some money, that is. For the second time now, Chase has offered me zero percent balance transfer checks, and for the second time, I will take them up on it. Not that I have any outstanding balances to transfer, because I don't.

What I will do is take their money, tuck it into my ING Direct savings account for the duration of the zero-percent term, and thereby make some money.

I discussed something similar to this in another article from July of 2003. There are also some good write-ups on this technique at My Money Blog and at PFBlog [   #1   #2  ].

Engaging in arbitrage like this (simple though it may be) is not for everyone. (That should be obvious!) There are risks involved. Luckily, most of them can be mitigated by studying the fine print and making sure you have a system in place that will allow you to succeed. Screw up and overlook a detail or two, though, and you'll find yourself shelling out interest and fees to the card company. In many cases it takes just one mess-up. Those punitive charges may quickly overtake any interest or dividends you can garner from the use of CCCM (Credit Card Company's Money).

I outlined some of the perils of credit-card balance transfers in the July 2003 article above. But an unending assortment of similar offers has taught me a few more related lessons since then. It seems as good a time as any to outline them here. So, several more of the common traps I've detected, which may or may not have been mentioned elsewhere, are as follows:

  Payments, Payments, Payments

I can't stress this one enough:   Make all your payments, to all your credit cards, on time. Miss any of them — not just the card with whom you're keeping your arbitrage balance — and chances are that your low-rate APR will go bye-bye.

  Mind the Semantics

Like most card companies, Chase sends me balance-transfer checks whenever they initiate these special promotions. Two of the checks are pre-printed with my name as the payee, with the amount left blank, for me to fill out. Chase specifically states that depositing these checks into your own accounts is a valid way to access the special-promotion funds. ("Simply deposit one in your bank account for extra cash," they write.)

However, not all card companies allow this. It likely even varies from offer to offer. Taking such an action with other companies' checks can be construed as a cash advance rather than a balance transfer, and thus will not qualify for the low promotional rates. Further, you'll get slapped with the applicable interest rates and fees for a cash advance, and these tend to be just a bit south of outright usury.

Lesson:   You have to be very careful about this particular aspect.

  Bruising Your Credit Score

In my case, I have used most all of my available credit line (more than 90 percent of it) from Chase for my scheme. This will undoubtedly dent my credit score, as "percent of balances used" accounts for a hefty chunk of the score's computation. (Check my FICO page for more on this.) This is fairly irrelevant to me, though, as I foresee no pressing need for a sublime credit score in the near future. Meaning that I don't plan to buy or refinance a home, or finance a vehicle purchase, anytime soon. Not, at least, in or near the period of the zero-percent offer.

  Ascertain the Promotional Period

Here's where Chase has gotten a little more sneaky. This is how they describe the offer's promotional time period:

"And because of your history on your account ending in XXXX, you have options. You can use all four checks and save with a low promotional 0% fixed annual percentage rate (APR) [emphasis theirs] through your last billing cycle that ends before November 1, 2005. So it's like writing yourself a fixed-rate personal loan . . .."

It'd be pretty easy to breeze through that paragraph and figure that you have the money interest-free through October of 2005 — or, if you're really in a hurry and not paying attention, through November of 2005. But that's not what it says. What it really says is that the low rate ends with the last billing cycle that ends before November 1, 2005, which means the low rate actually ends probably sometime in mid-October.

Savvy savers know the balance had better be paid back, in full, well in advance of that.

  Mandatory Purchases

The kind souls at Discover sent me a similar offer a few weeks ago:   zero percent on any balance transfer, good for the next twelve months. The catch (which I almost missed):

You must make at least one purchase per month on the card for the promotional rate to stay in effect on any transferred balances.

This wouldn't be hard to accomplish — you could charge a pack of Bubble Yum or something each month, I guess, and the interest would be negligible — but it was hard to spot this caveat in all the other fine print. Discover most certainly did not go out of their way to make this little point obvious to the user.