Credit Card Arbitrage

What is Credit Card Arbitrage

Credit card arbitrage alludes to the method involved with borrowing money from a credit card at a low interest rate and afterward investing that money at a higher interest rate to try to create a gain. The lowest risk and most common type of credit card arbitrage involves exploiting a zero percent early on annual percentage rate balance transfer offer to borrow great many dollars from a credit card for the duration of the starting period, which is much of the time 12 or 15 months. The borrower then puts this money in a higher interest however lower-risk vehicle, similar to a savings account, money market account or certificate of deposit, where the interest rate may be one percent to five percent, contingent upon market conditions.

BREAKING DOWN Credit Card Arbitrage

Credit card arbitrage has a higher probability of finding success in the event that a borrower makes all the required [minimum regularly scheduled payments](/least regularly scheduled payment) on the credit card on time and repays the balance in full before the basic period terminates. Even then, however, the amount of money one could earn from this strategy may not be worth the risk.

Borrowers frequently get less cash-flow than they expect while endeavoring credit card arbitrage. Assume you borrow $5,000 from your credit card at zero percent and invest it in a year CD that pays 2 percent interest. You would've earned about $100 in interest income toward the finish of the year term. In any case, your $100 will be taxed at both the state and federal level, and the interest income tax is higher than the more great capital gains tax rate. In this way, for 2021, an investor in the 24 percent federal tax bracket with $100 in CD interest income will be taxed $24 at the federal level, plus anything the investor's state tax rate is. At the end of the day, hope to lose dependent upon one-third of your credit card arbitrage earnings to taxes.

Likely Downside of Credit Card Arbitrage

In the event that you borrowed $5,000 from your credit card at a zero percent basic rate however at that point failed to make the base regularly scheduled payment on the credit card balance, your arbitrage opportunity is in all likelihood history. In the event that your payment is late, you will probably lose the 0 percent starting APR, be charged a $25 late fee, and see the rate on your card skyrocket to 30 percent. That is about $4 in interest each day on your $5,000 balance, which you'll need to rapidly pay off to end the interest charges. Furthermore, on the off chance that you need to pull out your CD before maturity, you'll need to pay a withdrawal penalty of multi day's interest, which is about $25, Taken together, the late payment, increased credit utilization and new credit line can hurt your credit score, making it harder in the future to get the best rate on an advance like a mortgage.