Balance Transfer Arbitrage: 0% Balance Transfers are Back

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Several years ago, in a more naive financial universe, someone discovered the art of “balance transfer arbitrage,” where you could basically take advantage of credit card companies offering 6-12 month 0% loans, put the money in a high-yielding savings account, and make a bunch of money in interest within the time frame. As time went on, the balance transfer’s more cynical cousin, the “app-o-rama” was developed. Here, people would apply for as many credit card applications all at the same time when their credit score was high. The goal was to 1) move higher interest debts to lower interest ones 2) allow for excessive use of the balance transfer arbitrage game 3) get as many sign up rewards as possible 4) build a credit history quickly. In this post, I’m going to detail a bit about the first strategy: balance transfer arbitrage.

In the glorious financial years before the economic downturn, a lesser-known phenomenon was gaining popularity that could gain a lot of cash for people who were disciplined and well-organized: balance transfer arbitrage. Two things made it possible: incredibly low interest rates for consumers and relatively high interest rates for savings (particularly online) accounts. In 2006 and 2007, it was common to find savings and money market accounts advertising rates of 4%, 5%, and even 6%. I was a “rate chaser” in those days and I earned over 5% at HSBCEverBank and FNBO online banks for almost nine months. Even the relatively conservative ING Direct APR crept up to over 4%.

At the same time, it was common to find introductory 0% APR interest rates on credit cards. Credit card companies were no different than all the banks loaning out crazy sums of money. Every major credit card company from Discover to Chase to Citibank to American Express had balance transfer introductory rates of 0%. Usually the introductory rates lasted for six to twelve months, but a few committed the bank to eighteen months of an interest-free loan.

So what exactly is balance transfer arbitrage and how does it take advantage of these rates? It is the process of accessing a large amount of cash at little or no interest from the credit card company, investing the money to earn interest (often at a high-yielding savings account), and then paying back the original loan before interest starts to accrue. It can be a little risky, especially if you decide to spend the money or put it into an investment vehicle that can lose value. Risk is also taken on in the fact that if you are late on a payment, the introductory interest rate will go up drastically overnight. By replicating this strategy across many credit cards and bank accounts, the profits can be huge.

Here are a few snippets from stories of the “golden age of balance transfer arbitrage”:

  • I know one person who used BTA to pay off over $25,000 in credit card debt in two years.
  • There were people who used BTA to avoid paying interest on college loans by continually transferring the balances.
  • There are stories of folks earning $20,000 to $30,000 a year in interest on balance transfer money!
  • I personally had close to $100,000 of OPM (other people’s money) sitting in the bank, earning at an interest rate of 6% for close to a year.

Of course, with the crash of the housing market and the sub-prime meltdown, 0% balance transfer introductory rate offers ended almost overnight. So did high-interest, online savings accounts and thus the demise of balance transfer arbitrage. After I paid off my last balance transfer, I decided that I was out of the game for good. I no longer wanted to be bothered with the risk, the hassle of the payments, and I wanted to let my credit score recover. Besides, as I said before, there were really no more offers available. So, I went several years without opening a new credit card or taking on any more interest-free loans.

That continued until earlier this summer when 0% APR balance transfer offers began to flood my mailbox. The offers are a little different these days and true “arbitrage” is really not practical as these companies have caught on to the scheme and savings account rates remain very low, but there are still things that you can do to take advantage of “free money” from credit cards. I’m going to share some tips and advice in future posts. Stay tuned!

  • Hank

    I’m thinking about combining balance transfer arbitrage with Lending Club’s high rates of return. I think that I can earn upwards of 10% or more on “free” money. Great article. I’m kind of glad to see this come back. I do have to admit that I am nervous about the risk aspect though.

    • SacJP

      Yeah but that risk sure is scary. Imagine if there were a financial meltdown with massive levels of default by borrowers (and you’d still be on the hook.)

  • KP

    That’s very surprising to hear that people were “earning $20,000 to $30,000 a year in interest on balance transfer money!”

    These days you have to be sure to read the FINE PRINT, given the new Credit Card Accountability, Responsibility, and Disclosure Act. Credit card companies are wiser and much more creative with fees.

  • Mike Z

    I am very interested, but I never got into the BTA game because:

    A. Balance transfer fees. For instance, let’s say I can find a bank account paying 2% interest today and a balance transfer card offering 0% APR for 12 months with a balance transfer fee of 4%. Before I even get started, I am in the hole by 4% – and that is not 4% after one year, it is 4% on Day 1. Paying that fee upfront instead of at the end of the year makes a big difference in the “effective interest rate.”

    B. Bank accounts simply aren’t paying enough (as stated in your posting). I’d be interested to see in your future posts some alternatives to bank accounts – such as making payments towards mortgage loans (at 5%), college loans (at 7%), car loans (at 10%), and the like. I’m sure there have got to be other opportunities out there too – perhaps P2P lending with the credit card money?

    C. Tax Implications. This one really bothers me. You cannot deduct interest paid on credit card interest (assuming you try a BTA with a low APR instead of 0%) or balance transfer fees….however, the IRS has its hand out on the other end of that transaction when bank interest income results. Perhaps your future posts can go into this issue more deeply.

    D. Credit Score implications (as stated in your post).

    E. Not knowing what my limit per card would be before I applied. If I apply for a card, my FICO score takes a hit. Assuming I am applied, I won’t even know what my limit will be. For instance, if I am approved for only $1,000 – how much BTA money can you possibly make off that credit level – $30 (if you’re lucky)? The headache of keeping track of everything and making a minimum monthly payment on the balance is simply not worth it unless I know I’m going to be approved for a huge limit upfront. Perhaps you can start a database of what your reader’s credit scores are and what types of limits they are being approved for so that the other readers know what to expect in terms of approval limits.

    On another topic…how much can a person really make from blogging? Thanks for the great reading each week!

    • Mike Z

      One other thing I forgot to add to my comment – although highly unethical, I think it would be interesting if you made a blog posting in the future about using credit cards for a strategic default. BTA only allows you to make money on the interest earned whereas a strategic default would allow you to keep the entire principle…of which is all unsecured money.

      People are starting to do this with their homes being underwater and I wonder if they are maxing out their credit cards too for strategic purposes, although highly unethical and immoral.

  • David Bakke


    First of all, fantastic article.

    I guess you could call me a “veteran” of this kind of thing, and I have been very successful with them in the past.

    All of these 0% BT offers seemed to dry up a while ago….have you uncovered some new ones?

    I can’t wait for your folow-up article on this. If you know of any “gems” out there, that is, the ones with 0% interest for at least a year and no balance transfer fee, please include them!!

    Thanks again for a highly informative post.

  • Joshua Caucutt

    Thanks, David . . . I don’t know exactly, but the offers just started coming in the mail and popping up in my old cc online accounts. I wonder if it has to do with credit score . . . mine is pretty high at the moment.

  • Joshua Caucutt

    Mike Z:

    Thank you for your comments, they have sparked quite a few post ideas. As for strategic default . . . there are all kinds of moral hazards all through out our financial system right now. I definitely do not support unethical ways of using money, but the combination of a credit-based culture and government enabling makes the penalties for abusing credit too lenient in my opinion.

  • RussN

    I was reminiscing of those days today when I went to the bank and saw the interest rates provided on 7 month CD’s. With the 0% rates now available from Citi at 0% for 18 months and no fee transfer offers with intro terms for more than a year there could be some serious earnings employing this old method. I wish I had taken more advantage of it to be honest at the time; but hey I also wish I had dumped everything I had into Bank of America stock a few years ago when they were hovering around $2 or Apple at $100.

  • RussN

    I was reminiscing of those days today when I went to the bank and saw the interest rates provided on 7 month CD’s. With the 0% rates now available from Citi at 0% for 18 months and no fee transfer offers with intro terms for more than a year there could be some serious earnings employing this old method. I wish I had taken more advantage of it to be honest at the time; but hey I also wish I had dumped everything I had into Bank of America stock a few years ago when they were hovering around $2 or Apple at $100.

  • Willmcm

    What happens if you do a balance transfer to a card with a zero balance? Can I then liquidate the credit balance on that card? Anyone tried this?