Ten Golden Rules to Balance Transfers

RULE 1: Low-interest credit sources.

First rule for arbitrage success is having low-interest credit sources. The best are credit cards with 0% APR. (This rate is usually only valid for a transfer of debt, not purchases.) Why do banks do this? Because there is huge competition in the United States for your debt. They're hoping you won't pay off the balance in time (see Rule #4) and will end up paying some of the normal APR, which can be very high. But if you properly take advantage of low rates, you can come out ahead. It may not be a lot without high balances, but even a few hundred dollars per year at no risk can be worth the effort.

RULE 2: High-interest liquid investment vehicles.

You must have a way to utilize the credit for profit. Your best investment vehicles for balance transfer success are:

1. High-interest online savings account with no or minimal fees. (Read more about online savings accounts at OSAWatch.)
2. High-interest, short-term CD (Certificate of Deposit) with no extra fees.
3. High-interest Money Market mutual fund with no penalties for early withdrawals and whose unit price will never drop.
4. High-interest, short-term treasury bills.
5. Pay off existing higher interest loans to save on charges.

Bonus credits or gifts are also nice. You can sell the latter at eBay for pure profit. If you can think of other investment options, they should meet the following criteria:

1. Be liquid. Withdrawal at any time, without penalties.
2. Have low or no fees. Fees reduce arbitrage profits.
3. Have high returns. At least relative to what your credit source costs.
4. Have no risk. Arbitrage = no risk. Stay away from stocks, mortgages, etc.

Choose wisely, and you'll make guaranteed profits.

RULE 3: Good credit rating.

There are numerous credit cards with 0% APR, but you need a credit score of at least 650 for the best options and maximum profit. If you don't have good credit, think twice. Keep applications to a minimum, as each credit inquiry will stay on your credit report (see Rule 10). Same if you have good credit but are planning on a mortgage or car loan within a year.

RULE 4: Organizational skills.

To get the most profit, time the credit applications with the opening of investment vehicles. Open the latter beforehand, if possible, and deposit the minimum amount, when necessary. You can recover that later. You may also have to set up regular bank accounts to accompany each investment vehicle.

RULE 5: Keep a log of all applications.

The more 0% APR credit card offers you can get simultaneously, the better. So do all your card research and apply to them all in the same day. Create a spreadsheet log to track your applications and status (sent, rejected/accepted, money received, etc.). Also keep track of the old credit card — or cancel it. Consider using Google Calendar to map out all of your important days. (Don't over-apply as each will result in a query on your credit report.) Keep your records in order for tax purposes too.

RULE 6: Timely repayment of credit sources.

Pay back your credit balance on time. Withdraw investments a monthly early, for safety. Not making your payments on time can cost you late fines that'll put a dent in your profits. (Read the fine print on each offer.) In fact, make payments on the balance immediately, if possible — even if it's a small amount each month, to reduce your total payout at the end. Else you run the risk of flipping over into the much higher interest rate on the balance.

RULE 7: Don't spend it!

This is an extension of Rule 6. Arbitrage doesn't work if you use your cards for purchases, mainly because purchase use incurs the normal high interest rate, not the zero or low rate. Remember that people with good credit are there because they're disciplined with repayment and general use. So cancel your cards when their offers are up. Even cancel the old card whose balance you transferred.

RULE 8: Don't be greedy.

Some investment vehicles require a few weeks to withdraw the money and have it transferred. Don't try to squeeze out a few more bucks in interest by waiting until the last minute to repay your balance transfer sources. If something gets delayed, you're screwed. Card issuers hope you'll still have a balance past the low-rate offer period. Don't give them the satisfaction.

RULE 9: Discipline, patience and diligence.

Do your homework and get ideal offers instead of rushing into unsuitable offers. Do your research for all apps simultaneously and apply when you have everything in order (investment accounts open beforehand, etc.) If you're diligent, you can keep finding new opportunities each year and keep profiting.

RULE 10: Start small.

Well, not too small. You want to more than break even with each round of arbitrage. But you don't need to make thousands to start. Ease into the process, get a feel for it, and build your credit rating by paying back credit lines early. Later rounds of arbitrage will likely be more profitable. Some people are rumored to hold $300K in balance transfers and make about $15K per year. At that debt level, if you slip up your timing (Rule 6) or get tempted to spend (Rule 7), the interest charges could ruin you into bankruptcy. Apply discipline (Rule 9).

By the way, if you have several applications accepted but each with small limits, you may be able to reallocate credit lines, thus minimizing any balance transfer fees.

Balance Transfer Arbitrage Examples

Here are a few examples that explain the steps a little more concretely.

Terms:

• APR = Annual Percentage Rate
• APY = Annual Percentage Yield (after compounding)
• BT = Balance Transfer
• CC = Credit Card
• CD = Certificate of Deposit
• CL = Credit Limit
• CSR = Customer Service Representative
• MMF = Money Market Fund: only liquid accounts with no penalties or extra fees.
• OSA = Online Savings Account: ditto.
• TB = Treasury Bill: ditto.

Assumptions:

• All sample calculations below use a flat interest rate for simplicity. Use the calculators at bankrate or maedastudio if you want more accuracy.
• Examples give "ideal" conditions. Your experience may vary.
• Steps listed are the key ones; you may need to additional steps.

Example 1: Simple Balance Transfer Arbitrage

You receive a few 0% APR CC offers and want to earn something from them. Assumptions:  0% APR CC for 12 months; good credit; desired amount: $10,000. American Express Blue is a good example, with no annual fee, up to 15 months 0% APR, 4.99% Fixed APR for life of balance transfer, 12.24% Variable APR for regular use after intro period.

1. Open a suitable no-fee investment vehicle (MMF, CD, OSA) with low minimum balance and no penalties, say at 5%.
2. Apply for card(s), if they haven't already sent you something in the mail.
3. Activate your card with the CSR over the phone. Ask for a balance transfer check.
4. When the check arrives, assuming you can write it out to yourself, deposit it into your investment account for 11 months.
5. Withdraw the money from your investment account (keeping a minimum balance if necessary to keep the account open) and pay off the $10,000 credit line. Your interest earned: about $10,000 x (11 m/12 m) x 5% =~ $458 plus a bit of compounding.

The above will work for people with no credit with something like the Chase Home Improvement Rewards Card, which has no fee, 12 m 0% APR, and 14.24% variable regular APR.

Example 2: Debt Shuffle Balance Transfer Arbitrage

Sometimes, a CC issuer will not let you write out a transfer check to yourself but will apply it to existing debt. If you have an existing credit line with cash advance options, you can employ that to complete the arbitrage strategy. The Advanta Platinum BusinessCard with Rewards has 0% APR for 15 months on BTs, 7.99% Fixed APR on BTs after 15 m, 7.99% Variable APR on purchases, no annual fees. Assume you have an existing maxed out credit line of $10,000 at a much higher rate.

1. Open an investment vehicle.
2. Activate new card with CSR; have BT check sent ($10,000).
3. Take a $10,000 cash advance from your old card and on the very same day, write out the new BT check to the old card's issuer. Result: no daily interest charges on the advance.
4. Deposit the cash advance money into your investment vehicle for 14 months. etc.

Example 3: Low-Percentage Variation

Example 2 will also work if the new card has a low interest rate, say 1.9% for 15 months. However, you'll want to be paying off the $10,000 in 14 months (one month less than the offer, for safety's sake). At 1.9%, you'll need to pay at least $723/month for 14 months to not have any balance after 15 months. This amounts to about $119 interest, but you earn $10,000 x (14/12) x 0.04 = $466. So your total profit is $466 - $119 = $347 in 14 months.

If you don't want to pay that much per month and can't get a 0% card, then your alternative is to pay less monthly and take a lower profit. You'll need to do the calculations to figure your monthly cutoff.

Example 4: Non-Zero APR, Balance Repayment

[Advanced] You currently have a high-rate balance on an existing loan or credit card — say $10,000 at 12%. You want to pay all or some of it off at a lower rate, say 1.99%. (0% is better, but maybe you can't get such an offer.)

1. Get a 1.99% APR credit card, such as the Merrill+ Card, with a limit of $10,000 on a 12-month BT offer, regular rate 9.99% Fixed APR. Keep in mind that after the 12 months are up, your card might be accruing interest at a higher rate than your old 12% rate. (Not in this example, but it's possible.)
2. Pay off your old $10,000 debt (at 12%) with the new BT check you receive.
3. You will be accruing interest, in this case at 1.99%, so if you don't want a balance at the end of 11 months (one month safety), you need to pay about $919/month for 11 months. That's a cost of about $100 interest, but there'll be nothing to pay off at month 12.

So where's the arbitrage in that? You didn't make money, right? Ah but you did — you saved money by not paying the older 12% rate. At 12%, you would've had to pay about $965/month for 11 months to pay off the $10K — an expense of $610 in interest. So you saved $500 in interest charges and likely improved your credit rating for being timely. If you can't afford that much per month, an alternative is to skip the 1.99% card offer and find one with a permanent rate lower than 12% and which allows a balance transfer.

For additional advanced arbitrage options, have a look at Hustler Money Blog.

Summary

There are pitfalls [must read, and comments too] to using 0% card offers, and you do have to be organized and willing to do the necessary research. If you plan to keep cycling through offers over a few years, you'll probably want to keep your investment accounts open as some require a credit check, believe it or not. You might also need to maintain a minimum balance. It's paying attention to these sorts of things that'll make the difference between maintaining or building your credit rating and making profit, or ruining your credit and losing any profit to fees.

Keep in mind that the point of balance transfer arbitrage is to employ zero-risk opportunities with OPM (other people's money) — in this case, banks'. So always read the fine print on all your credit card offers and investment accounts.

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