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Living with credit, Rewards

Risky business: Cashing in on credit card interest rate spread

Connie Prater

I know there’s a group of credit card users out there who maximize rewards and cash back offers on their cards to get the maximum benefits they can. I’ve never been one of those “reward junkies,” but I’m starting to reconsider it.

I didn’t want to bother with keeping track of points or miles or having them expire on me before I could redeem them. My life is already complicated enough, thank you very much. Why do I need to spend time keeping track of rewards that only add up to a few dollars?

Drive-through pitch
A pitch from my credit card issuer had me rethinking how best to maximize my credit card benefits. When I went through the drive-through teller one recent Friday afternoon, the teller informed me that I had the “opportunity” to get a second credit card with them. I had to strain to hear what she was saying because the nearby traffic noise at the drive-up was drowning her out.

The basic terms, as she explained them, were this: a $3,500 limit with 0 percent interest for a year. She went on to explain that I could use the money to transfer balances from higher interest credit card accounts.

Or, she said, I could use the card to purchase a certificate of deposit (CD) and earn interest on the CD using money from the 0 percent credit card. I would be able to make money off of the difference between the 0 percent credit card and the CD. When I checked a few days later, six-month CDs were paying about 3 percent interest or less. So I would pocket the difference between 3 percent and 0 percent, minus any credit card fees. Three percent of $3,500 is only $105 and then I’d have to deduct any fees. Is that kind of return worth my effort?

Not for everyone
Of course, one slipup with a credit card payment and you are into default mode with high interest rates. That would kill any gains from the CD. This is not for those who forget to pay their bills or who aren’t organized.

I told the teller I would have to think about the offer (like I’m going to make a financial decision at the drive-through window? Yeah right.) But it got me wondering about how many people actually do this, which I discovered is a well-known financial technique called arbitrage. It’s the purchase or sale of an asset so you can profit from the difference in the price in separate markets. It’s done for all kinds of securities and financial products. But if you think about the people who go to garage sales and buy junk for pennies only to turn around and sell them on eBay for a killing, that’s arbitrage too.

I mentioned the credit card pitch from my bank to my editor and suggested we write an article about it. His response: “We already have.”

Credit card arbitrage
Creditcards.com freelance writer Craig Guillot explains how it works. Guillot points out in the article that, “Consumers are unlikely to hear about credit card arbitrage from financial advisers or from credit card companies, but a search on the Web will reveal numerous bloggers and underground arbitragers who play the system to earn money from their credit card companies.”

Well, based on my experience with one of the Top 10 credit card issuers, the banks are pitching this idea to customers — at the drive-through.

Seeking advice
I’d love to get some advice from those who have tried credit card arbitrage — successfully or unsuccessfully. Leave a comment.

See related: “Credit card arbitrage: Easy, but dangerous money

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  • Rike Dunlap

    I’ve been doing it for several years, but didn’t know it has a name and that so many others were doing it, too. So far, I haven’t had any problems, and I think it’s a lot of fun.