“You need money to make money,” is usually true -- for the most part, anyway. You can’t invest money for the future if you have none, and there are few other ways to earn income outside of working for it unless you have some seed money to get started.
A strategy called arbitrage provides a potential workaround when you don’t have a lot of cash to invest for the future. But credit card arbitrage comes with a lot of risk. If you’re curious to know how it works and how it applies to credit cards, read on to learn more.
What is arbitrage?
Arbitrage, according to Harvard Business School, is an investment strategy that involves buying something with the goal of selling it for a higher price somewhere else. The goal is to quickly recoup the money you put into it while still making a profit. Arbitrage can take on many different forms, but it often requires $0 in start-up capital. On the other hand, it involves more strategy and forward thinking.
Arbitrage can (and often does) take place with physical items, such as furniture, antiques or household items. For example, someone might buy items at a wholesale price then sell them for a higher retail price to consumers.
It can also apply to credit cards, and anyone with good enough credit to get approved for offers can use this strategy. For example, many people rely on 0% APR credit cards for the purpose of arbitrage, and these offers are typically geared to those with very good to excellent credit.
How credit card arbitrage works
Credit card arbitrage typically involves using a credit card with an introductory 0% APR to access funds that are used to invest. For example, someone might tap into a card with a 0% intro APR offer to access money that they put into a high-yield savings account or a certificate of deposit.
Credit card arbitrage requires you take some additional steps to make it financially feasible. Taking out a cash advance on your credit card, for example, typically results in fees and a much higher cash advance APR that applies from day one.
It may be possible to use cash advance checks to access funds for investing, but these checks can come with their own fees and fine print.
In some cases, you can sidestep added fees by using credit cards that offer introductory 0% APR on purchases to buy gift cards. You can then use the gift cards to buy money orders, which are ultimately deposited into the bank and used for investing. Again though, introductory APRs don’t last forever and the fees involved in buying gift cards and money orders can eat away at future gains.
Risks and downsides of credit card arbitrage
Credit card arbitrage can potentially help you get ahead. If you’re able to access $5,000 in cash with an introductory 0% APR credit card and earn a 5% return on that money in a high-yield savings account for a year, for example, you’d end 12 months with $250 in gains.
However, there are considerable risks involved in this strategy that make it a poor choice for the vast majority of people.
Credit card debt and potential for interest
Accessing cash with a credit card may seem harmless, especially if your card is offering an intro 0% APR for a limited time. However, introductory rates won’t last forever, and credit cards start charging their regular variable APRs after that.
If you don’t pay off the balances you charge to a card before the intro period ends, you can wind up paying considerably more in credit card interest than you earn through credit card arbitrage.
Poor investment choices
Using credit card arbitrage to put money into a guaranteed investment like a certificate of deposit and to a lesser extent a high-yield savings account, can help you get the return you expect. But it’s possible to lose money with other types of investments -- especially in the short term.
If you tapped into a card for $10,000 and used it to invest in individual stocks or cryptocurrency, for example, you could end up with big losses. And on top of what you lost, you’d still owe your credit card the full amount you borrowed. If you’re unable to pay it back right away, you could be facing large interest charges.
Damaging your credit score
If you make a late credit card payment or miss one entirely, your credit score could take a huge hit. You could also see late fees and penalty interest rates apply to your balances right off the bat.
Owing money on your credit card can also raise your credit utilization ratio -- how much debt you have in relation to the size of your credit limits -- which is a major part of your credit scores.
Fees on either the investment vehicle or the credit card
Credit card arbitrage often requires fees and other charges on either end of the transaction. These fees could include cash advance fees or fees required to buy gift cards or money orders with your card.
Even if you’re able to access cash with an intro 0% APR credit card without any fees, the gains you secure through credit card arbitrage will likely be considered taxable income. In other words, you’ll owe income taxes on money you earn in a high-yield savings account or a CD, or on gains you secure by investing in securities and selling later on.
The bottom line
At the end of the day, credit card arbitrage comes with the potential for considerably more risk than reward. Not only are there myriad fees and hidden charges, but you are taking a gamble with your credit any time you borrow money with a credit card.
A much better strategy with intro 0% APR credit cards is using them in the way they were intended – for debt consolidation and to pay down large purchases with zero interest for a limited time. Better yet, strive to avoid credit card debt completely and focus your energy on benefitting from credit card rewards and perks instead.
The editorial content on this page is based solely on objective, independent assessments by our writers and is not influenced by advertising or partnerships. It has not been provided or commissioned by any third party. However, we may receive compensation when you click on links to products or services offered by our partners.
