Make Money with Balance Transfer Card Arbitrage

In "How To Make Free Money With Balance Transfer Card Offers", we looked at how some very smart credit card holders are making money from balance transfer credit cards. In this article we're going to look at the things that can backfire when using this strategy. This credit card strategy is not for everyone. If you make one little slip in executing this arbitrage play, it could wind up costing you money instead of making you money.

Here are 4 things you need to watch out for when implementing the balance transfer card arbitrage tactic:

(1) Whether or not the the convenience checks issued by the credit card company are treated as a cash advance or a balance transfer. Be very careful with this because, the credit card issuer may classify a check made payable to the card holder as a cash advance and not a balance transfer. If the offer considers balance transfer checks made payable to you to be cash advances, forget about it. Outside of the default APR, the APR for cash advances will be the highest you have to pay.

(2) Know which APR applies. Yes the offer states 0% APR balance transfer, but that doesn't mean that its the same one for purchases or for cash advances. You may find some 0% APR on purchases offers, which is great, but in most cases, there's a higher APR for purchases. As I stated before, outside of the default APR, the cash advance APR will be the highest you have to pay. Don't use your balance transfer card to make purchases. You should use another credit card, like a cash rewards card, for purchases. Don't use your balance transfer card or any other credit card for cash advances - in most cases, the cost to you is just too high.

(3) Transaction fees for balance transfers and caps. These fees are spelled out in the terms & conditions of the offer and expressed as a certain percentage of the balance, as well as a minimum and a maximum dollar amount. The lower the fee the better for you and no transfer fee is the best. Keep in mind that transaction fees will reduce the amount of money you can make from this arbitrage play. For example, State Farm Bank will pay you 5.5% for depositing $30,000 with them in a high yield savings account, but the credit card company is charging you 3% in transaction fees on that $30,000 balance, leaving you with a net of 2.5%. The fee knocks out the excellent interest you're earning at the bank. Also avoid offers that have no caps on the transaction fees.

(4) Length of promotional rate period. The teaser rate is usually good only for a limited period of time. For the purposes of maximizing the interest that can be earned, look for deals where the teaser rate is good for 12 to 15 months.

Oh, There's More To Watch Out For

Here are 2 additional traps to beware of:

(1) Beware of purchase requirements to maintain the low interest rate. In most instances, the APR for purchases, is going to different from the APR for balance transfers. The balance transfer gets the teaser rate and any purchases get the higher interest rate. Any payments on that credit card will be applied to the lowest interest balance first, then the meter starts running on the interest for any purchases made. That's why you should only use the balance transfer credit card for borrowing only.

(2) Be sure to make all payments on all debt reported to credit bureaus on time! Most credit card companies, under the Universal Default Clause, can jack up the APR you pay if they discover that you were late in paying any creditor. Set up monthly payment reminders if you are prone to forget. Better yet, set up automatic bill pays to make your payments. Speaking of payments, if you are depositing the borrowed funds into a high yield savings account, link it to a free checking account with the bank for the purpose of making the minimum payments. Most banks put a limit on the number of ACH withdrawals from high yield savings accounts and some major credit card issuers will flat out reject any payments from these accounts, which may trigger the default APR.

As stated in "How To Make Free Money With Balance Transfer Card Offers", you need to thoroughly analyze and understand the terms & conditions of a balance transfer card offer in order to make money with this arbitrage strategy. Remember these 6 things to watch out for when considering a new balance transfer offer and you
will give yourself the best opportunity to profit from balance transfer arbitrage.

2006 Ray E. Harris. All rights reserved.