Last month, I put out a request for reader questions, and I'm excited to start sharing some of the questions and stories I received! The readers are what define this website, and so I want to continue to produce content that is relative to you!
Anyway, I received a question from Renee on possibly using a credit card balance transfer to make some extra money. Here is what Renee asked:
I am always trying to look for way to make more side income. I like to work, so I do a side gig babysitting (I love children). My mom did a balance transfer with her credit card debt and took money offered from one bank with 0% interest to pay off a higher interest loan.
My question is: if I found a bank that was offering either a balance transfer or a credit card, for let's say $5,000 at 0% for 18 months, is there a way I can take all of that money and put it in a low risk investment for a year or so to make some extra income? I would not touch it for any reason. I was thinking a savings account or a CD? Is this legal? Do people already do this?
Renee, what you're talking about is called credit card arbitrage. I wrote about it about a year ago. It's actually something that used to be a very popular way to make money and take advantage of low interest rate credit cards and high interest rate savings accounts. However, over the last few years, with savings accounts yielding nothing, less people have been doing it.
Here is how it works, using your example:
- Sign-up for a credit card with a 0% APR for 18 months
- Find a CD at a bank for 18 months if possible (you will most likely find them for only 12 months)
- Right now, the best 1 year CDs are earning about 1.1%
- If you take the $5,000, you would earn $55 over 1 year
- However, you would need to continue making minimum payments each month on $5,000, which are usually about 2% of the balance, or $100 per month
As you can see, you would earn $55, but is the hassle of dealing with it, and still having to make the minimum payments each month, worth it?
When rates were higher, around 4%, you could earn $200 per year with a CD. With that amount, people were much more inclined to use credit card arbitrage to make some extra money.
Have you ever used credit card arbitrage? Any tips on it?