Credit Card Arbitrage Costs Go Up

Until very recently a savvy cardholder had an opportunity of making free and easy money out of his/her bank. It was a warming feeling to earn from the interest rate rather than pay it to the issuer and lose hundreds or thousands of dollars.

Earning with a plastic card became a widely spread practice, referred to as arbitrage game, once there appeared 0% or very low APR features. When 0% balance transfers were introduced, it gave users a great field for maneuvers to save and earn on debt payoff.

Not quite expected by issuing companies, the arbitrage game successfully paid for itself for a long time, topping up consumers' accounts with thousands of net profit. Now the question is: will the banks put up with their customers' smart financial tricks, or is the arbitrage game doomed?

A few words on theory. The so-called credit card arbitrage is the practice of taking advantage of the 0% APR or low % benefit by investing it into a high-yield savings account. The scheme of actions is as follows: a person applies for a no annual fee, 0% intro APR balance transfer offer online and moves his debt onto it. Based on the length of the introductory period, which is preferred to be 12 months, the person opens a 4-5% savings account. Then he writes himself a check for the balance transfer amount and puts it into that savings account.

Keeping up with the minimum monthly payments on the 0% balance transfer plastic, the customer withdraws the necessary amount 2 or 3 weeks before the payment due date, covers the balance remaining and pockets the difference. No new purchases are made during this year as a new balance would reduce the profitability of the arbitrage game to zero.

It's easy to calculate that this manner of using balance transfers does not generate any significant profit for the banks. The banks entice you into a spending spree, offering low interest rates on purchases and points or cash back rewards. Every second customer gets on the hook and ends up enriching the companies' funds.

But the number of reasonable consumers is large enough to pose risk of loss for the issuers. Striking back, all major companies are either eliminating the 0% balance transfer feature on their products or raising the balance transfer fees with no caps on the maximum charge.

Rating as much as 3% of the amount transferred and setting no cap, a transfer of a significant debt might make the whole deal unprofitable for you. Move $20,000 and lose $600 in the balance transfer fee. There's not much of luster here.

Currently, there are a number of companies that do have a cap. A suite of business offers from Advanta Bank charge up to $90 in a transfer fee and offer 15 months of teaser period. A smart user can make a good deal with suchlike features. Evidently profitable are Discover balance transfer cards with the maximum of only $75 of the fee.

Despite this, analytics warn that the best balance transfer cards may be cancelled in the nearest future. Today is the best time for balance transfer application to play the arbitrage game.