The Prints and the Popper

April 28, 2008 6:27 AM

I have this money-making idea in mind, and I wanted to test its potential viability and profitability with some of you who may know more about banking and credit cards...

So my idea is pretty simple. For starters, I have great credit. My plan is to take out a couple new credit cards with a $10,000 line. I take it off one and invest it into a CD account with 4% interest (like ING, for example). Every month, I pay off the $10,000 going back and forth between cards, and in the span of a year, I net $400 from interest on the CD account.

Or take out 24 cards and net $400/month (104 cards/$400/week, etc.).

So yeah, it seems simple enough in my head, at least other than for the potential non-FDIC insured $520,000 I'll have floating around and the nightmare of paperwork on tax day.

So do I have it wrong anywhere? Am I overlooking anything?

posted by Christ, what an asshole to work & money (15 comments total)

How are you going to pay one credit card off with another? Balance transfer? With those "convenience checks"? Either way, they usually charge you a flat fee or percentage of the amount in order to use those. On $10k that would eat up your piddly $400 pretty quickly.
posted by misskaz at 6:31 AM on April 28, 2008

Somewhat similar.
posted by entropic at 6:42 AM on April 28, 2008

Oh, I've had this idea. (Except, of course, I bought a big-screen TV instead of sensibly investing in a low-risk CD).
posted by muddgirl at 6:43 AM on April 28, 2008

If you miss a payment on one of your cards, the interest rate might shoot up for all of them (in what's called "Universal Default"). Also, I'm not sure you'd actually be able to completely avoid interest by shuffling around the debt. For one thing, the balance transfer interest rate may be different then the purchase interest rate and you may have balance transfer fees as well. I imagine that those fees would eat into any profit you might get.

Also, there is no way they'll let you take out 24 credit cards in the space of a few months, especially if you have all or some maxed out. You'll look like someone who has just had a financial emergency and might not be able to pay back your loans. Having too much credit is bad for your credit rating as is not having any. There is just no way you're going to be able to get $520,000 in unsecured debt in that short period of time.

It might be possible to simply get credit cards that have an introductory rate of 0% for several months (I've been getting offers on cards that have that rate for almost a year now). You could use those cards and take the cash and put it into a high yield savings account, but in order to do that, you'd need to get some cash out, and many cards won't give you the 0% on cash advances.
posted by delmoi at 6:43 AM on April 28, 2008

1. You're not the first to think of this. Google "credit card arbitrage".
2. I don't think you're going to be approved for $520,000 in unsecured credit, unless you're already wealthy.
3. You're not going to get 4% anymore. ING pays 3% now, and interest rates are probably going down again soon.
4. The good news is that the tax paperwork won't be hard at all. Any bank that pays you interest will send you a 1099 reporting your income. You report this income on your tax return and pay taxes on it. Simple as that.
posted by Dec One at 6:45 AM on April 28, 2008

I agree with the points above. You are basically talking about an App-O-Rama, which is not very easy and doesn't have that great of a payoff.

You're not going to get 4% anymore. ING pays 3% now, and interest rates are probably going down again soon.

I'm still getting 4% at CountryWide, but in general I agree 4% is the absolute maximum you can reasonably expect for the next few months.
posted by burnmp3s at 6:54 AM on April 28, 2008

I'm sure the banks have already thought of this as well.

As others have said, higher cash advance rates and balance transfer fees will almost assuredly outweigh what you're gaining in interest, or, at least, will reduce it to an amount not nearly worth the headache.
posted by owtytrof at 6:55 AM on April 28, 2008

Don't most credit cards start charging interest immediately for cash advances?
posted by electroboy at 7:02 AM on April 28, 2008

That is, rather than giving you the 30 days grace period with purchases.
posted by electroboy at 7:03 AM on April 28, 2008

Most balance transfers or cash advances charge a one-time 3% fee usually with a max of $75. There are occasionally offers to transfer balances with no fees, but most of the time they will start charging you interest immediately. I get a lot of these offers all the time - I think once I got an offer for a zero fee balance transfer with a one-year 0% interest which I did take advantage of, because what the hell, it's free money, but it was very unusual (it was used as an incentive to get me to accept an Alumni Association credit card).
posted by thomas144 at 7:19 AM on April 28, 2008

In the Uk this is called stoozing, mainly encouraged by Martin Lewis who runs the MoneySaving Expert website.

He's got quite a good explanation of it here
posted by lloyder at 7:48 AM on April 28, 2008 [1 favorite has favorites]

That's not a lot of reward for a ton of risk. If you are really good at keeping up on things (like bills), that reduces the risk.
posted by gjc at 8:02 AM on April 28, 2008

I already did this, if you're organized there is not really much of a risk other than getting a crappy credit score in the short term.

I only did it for one card though. I made about $380 before tax in 9 months. Not bad for doing nothing.

Another thing: to do that you need a balance transfer to a credit card that has a zero balance, so they will send you a check in the mail to cash. The balance transfer fees seem to max out on $75 (but you may find a free one, I did, but that was last year), so that eats into your profit.
posted by sandmanwv at 8:07 AM on April 28, 2008

I've done the balance transfer arbitrage before. You're plan sounds like a little too much work.

-Find cards that have 0% apr for 12 months. I'm not sure if they're still being offered, but at least then you can keep the money put for a while and not have to pay the entire card off every month.

-There are 3 cards that offer good BT fees: chase, citi and discover. They are like 3% with a max of 75. Those are the cards that you want to use.

-you'll only be able to get about 6 cards or so. Make sure that you get at least one 0% card from each of the 3 companies above. I got 6 cards roughly and then merged the credit limits onto the 0% BT cards.

-pay the minimum every month on time. Do not use the cards for anything else. If you do, you'll lose the 0% offer and have to start paying interest on everything you've taken out. This never happened to me, but if you get one finance charge, you're basically hosed.

-your credit score WILL drop. Mine dropped almost 150 pts after I took out the money. However, when I paid the cards back it bounced back within 30-45 days. Credit report requests, to apply for the cards, will ding your score as well.

-The interest rate right now is not that great. I'm not sure I would do it again right now, but I would do it again in the future. I did it when rates were at about 5%.

-Do not lock that money up! Stock market is too risky. Long term CDs are risky (seriously!). You may want to pay off the principal on the cards in short order for any number of reasons. I got out about 2 months early from my 12 month cycle because I wanted to improve my credit in anticipation of buying a condo. I just pulled it out of savings. If you have to pull it out of a CD then you're gonna pay penalties.

-Do your research(!!!). There are plenty of websites that show all the credit cards, their fees and their BT offers. I spent about 2 weeks doing the research before I finally started the deal. Also, make sure that you ask for BT checks when you activate your cards so you don't waste anytime waiting for them to send them to you.


On the upside:

-I have a much higher credit limit now all around. I'm not planning on using it for anything, but its nice to know that I can have access to that money if I need it.

-I did make money. More than the money I had invested in the stock market at the time did with almost no risk. Keep in mind that you're going to get taxed on this though. So don't make $1000 and spend it on a flatscreen. You'll want to keep at least 30% aside to pay taxes just in case.
posted by kookywon at 8:12 AM on April 28, 2008

I have done a few rounds of app-o-rama's myself. They are getting somewhat harder to do because many credit card issuers are "cracking down". The Fatwallet Finance forum is probably the best place for cutting-edge intelligence / advice on this issue, but my impression of the current state of affairs is:

1. Read the fine print of the credit card offers / terms VERY carefully. "3% fee, $75 max" or "no BT fee" was the norm a few years ago, but now "3% fee (no max)" is very common.
2. Consolidating lines of credit is slightly more difficult. Before, you could apply for five or six lines from the same issuer, and then immediately consolidate those lines to your card with the best 0% offer. This is more difficult with some lenders.
3. This will screw up your credit. 100% utilization on multiple lines will REALLY lower your numbers, so make sure you understand waht you're getting into. (66% and 50% seem to be more favorable breakpoints for utilization levels.)

Also, the way the AOR usually works is that one applies for a "bunch" of lines of credit at the same time. This way, all of the inquiries are treated as close to "one" on your credit report, and you have yet to draw down on the (other) lines of credit at the time of the inquiry. This takes advantage of the "lag" in credit utilization reporting.

Besides promo offer rate arbitrage, the AOR is also useful to rack up multiple sign-up bonuses (free toasters, airline miles, etc.) It has become more difficult recently because some issuers (Chase) are only permitting you to get the miles "once" (but there are varying definitions of "once" -- i.e., once for a personal line and once for a business line).
posted by QuantumMeruit at 8:14 AM on April 28, 2008