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Cashing in on Credit Card Arbitrage

Credit card arbitrage is a fairly new phenomenon and is an interesting twist on the basic concept of arbitrage. While it’s not right for everyone, if you have a decent credit score and a lot of discipline, you could practice a little credit card arbitrage and make a tidy profit. This article will discuss how the concept works and point out some of the dangers of the process if you’re not careful.

The term arbitrage is of a French lineage and basically applies to any investment that takes advantage of market differences. For example, if you walk down the street and see a store with a sign in the window that says “we will buy apples for a 25p each” and then proceed to the next block and find a food vendor selling apples at 20p each, you can take advantage of this opportunity by applying a little arbitrage. You can simply buy all of the apples you can carry from the vendor, and walk them back up the street and collect your profit. This differs slightly from the concept of retail, since unlike a retail transaction, you know the sale price in advance. Arbitrage is a financial “free lunch” and can be a very profitable exercise if properly applied. Most forms of arbitrage rely on a high volume of transactions with a small profit each. As long as the transactional costs are low enough, there is a profit to be recovered.

Credit card arbitrage is made possible by the abundance of credit card offers that extend credit at an introductory rate of 0%. Couple this with the fact that you can then take this “free money” and invest it in an interest bearing account for a period of time and reap the profits, and you have the basis for credit card arbitrage. Although in principle this seems simple enough, you have to be careful to pay attention to the details.

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All of these offers are for a limited period of time and you must be sure to pay off the card before the anniversary date hits or have the outstanding balance adjusted upwards to a higher rate. This date can sometimes be a little tricky to determine and you have to read the credit card contract carefully. If you have any concerns, place a call to their customer service line to confirm the date. Also, you must really be diligent to ensure you make your monthly payments on time. Being late on even one of these payments will cause the introductory rate of 0% to jump to a much higher rate immediately as well as incurring a late payment fee. This simple mistake could easily wipe out any positive gain you may have accumulated. Also, since all of the banks and credit card companies share information, missing a date on one card may cause all of your cards to jump to a higher rate. We highly recommend setting up a Direct Debit which will pay the card in full each and every month so you can be sure of not missing a payment.

Another concern is that when you are driving a new card up to its limit, you will really impact your credit score. So be sure you only do this type of activity if you aren’t planning on making any major purchases for a while or you may have to incur higher interest rates on future loans. Another thing to watch is any caveats to maintaining the 0% rate on your balance. Some cards will give this to you for the introductory period with no strings attached, while others might require you to make a monthly purchase with the card to continue with the rate.

As with any arbitrage situation, the larger the investment, the better the return. Doing this process with a small amount of money will only yield minimal results and may not be worth the risk. But if you have the ability to secure a credit card with a large enough limit, or a group of cards that offer a 0% introductory rate, this could be a good way to generate some easy returns with little investment. The key things to remember are:
 

  • Always make the minimum payment on time for the card

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      • Be sure to pay off the card before the anniversary date

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          • If you are going to use more than one card to do this, get them all at the same time

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              • Only do this if you are not planning on making any major purchases until the process is complete
                • Now that you understand how a credit card arbitrage process works, you can decide if it’s right for you. Just be careful to watch your due dates and pay the card off before the rate jumps higher on its anniversary date. If you can follow these suggestions, credit card arbitrage might be an easy way for you to generate some additional income with very little work. To find the best 0% for new purchases card click here.

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