Is it really possible to make "money for nothing" like Dire Straits sang in their hit single from ? People who profit from credit card arbitrage say yes. But is it a smart way to beat the credit card companies at their own game, or a risky way to accumulate high interest debt and pummel your credit score in the process?

Arbitrage is the process of simultaneously buying an investment vehicle at a lower cost and selling it at a higher price and profiting from the difference in prices. Credit card arbitrage involves borrowing money from credit card companies, then investing that money in an instrument offering a higher interest rate than what you're paying. Here's how it works: You fill out the paperwork and make out one of the pre-printed checks the company sends with the offer payable to you.

You do a little homework to find a high-yield savings account , CD or another instrument offering a higher interest rate. Invest the money, make at least the minimum payments each month on time and, when the initial lower "teaser" rate expires, withdraw the money, pay the balance owed on the card, and keep the difference as profit. See our article Are You Living Too Close To The Edge? It's an easy way to make money for free, right? In reality, it's not that simple, and it can actually cost you more than you can afford.

And if the borrower repays the entire amount on time, it can demonstrate that they're able to manage and repay debt which can, in turn, potentially boost their credit score. But as A vi Karnani, co-founder of the financial planning website Thrive said in a phone interview, "it's a gamble like no other. Making a Poor Investment Choice One of the underlying assumptions about credit card arbitrage is that it's possible to find a "safe" investment that will earn you a significantly higher rate of return on the money you borrowed to invest.

But in a difficult financial environment, those vehicles are harder to find. And don't just look at the interest you could earn — you've got to know the terms of the investment you're making.

If you needed to withdraw your money early, would you be charged a penalty? Creating a Debt Habit An often unforeseen consequence of engaging in behaviors like credit card arbitrage is actually psychological. Defaulting on the Loan The money that you get from the credit card company is a loan. If you fail to repay the company according to the terms of the loan, you're in default.

The Theory Behind Opportunism: Arbitrage and Interest Rate Parity — EconoGIST

Costs can mount quickly, and not only nullify any financial gain, but actually saddle you with debt that could take months or years to repay. Unexpected life changes can quickly deplete liquidity you may have been planning to use to make the monthly payments.

No one plans for those types of things to happen to them.

Hurting Your Credit Score Engaging in credit card arbitrage could hurt your credit score in several ways: Finding Out the Rules Have Been Changed According to Curtis Arnold, CEO of Cardratings. It's a tough environment.

What was considered hard and fast in the credit world is being changed overnight. Companies can change your payment due date, shorten your billing cycle , raise your interest rate and add fees all without you being aware of the change.

The implications can be serious. Conclusion While some people may have the financial discipline and capacity to engage in credit card arbitrage, there are significant risks that should not be overlooked. However, there are still some offers out there that might make sense for people with the right approach and discipline," says Arnold. To have the highest probability of success, Arnold gave the following tips.

If all of these steps are followed, you have a better chance at making credit card arbitrage work, but it's still a risky maneuver. To read more about credit cards, see our related articles Six Major Credit Card Mistakes , Understanding Credit Card Interest and Cut Credit Card Bills By Negotiating A Lower APR.

Dictionary Term Of The Day.

Credit Card Arbitrage: Free Money Or Dangerous Gamble?

A measure of what it costs an investment company to operate a mutual fund. Latest Videos PeerStreet Offers New Way to Bet on Housing New to Buying Bitcoin? This Mistake Could Cost You Guides Stock Basics Economics Basics Options Basics Exam Prep Series 7 Exam CFA Level 1 Series 65 Exam. Sophisticated content for financial advisors around investment strategies, industry trends, and advisor education. Free Money Or Dangerous Gamble?

By Katie Adams Share. Opening a new line of credit typically hurts your score Borrowing money on the new card increases your utilization ratio how much credit you have available: Increasing your overall debt to income ratio is a negative.

For more, see Consumer Credit Report: Carefully read the terms of the credit card company's offer.

Do the math to make sure that after expenses are paid, it's going to pay a reasonable rate of return. Set up an autopay system for the monthly payment.

Join an online forum to learn the latest industry trends, traps and tips. Look for balance transfer offers with no expiration dates. These offers may have a higher interest rate but you can lock in that rate until you pay the balance off in full, which significantly extends your investing time horizon. Have a "plan b" — a way to quickly access liquid savings and repay the loan in full if necessary. The average American household has four cards, but does that mean more is better? We give you 4 reasons to consider using a credit card instead of a business loan to fund your business, and how to be smart about it.

It's important to maintain a good credit score. Discover what could be lowering it without your knowledge. Reducing the rate charged on your credit card balance is the first step to getting out of debt.

How To Get The Lowest Mortgage Interest Rate Possible | Financial Samurai

Find out why having too many credit card accounts can adversely impact your credit score if the cards are not managed properly. Can't get a credit card without a credit history, and can't get a history without a card? Understanding credit card rates will help you choose the right credit card, and avoid any unpleasant surprises.

A small business credit card can be a convenient way to increase your company's purchasing power, but must be carefully managed.

Avoid these pitfalls to keep your credit score healthy and your debt under control. It seems contrary to smart financial planning, but increasing your credit limit can actually be a smart move.

Find out how secured credit cards function and why they can be very useful for those looking to build or rebuild their credit Learn about how using a Best Buy credit card responsibly can lead to a higher credit score and lower interest rates on mortgages An expense ratio is determined through an annual A hybrid of debt and equity financing that is typically used to finance the expansion of existing companies. A period of time in which all factors of production and costs are variable.

In the long run, firms are able to adjust all A legal agreement created by the courts between two parties who did not have a previous obligation to each other. A macroeconomic theory to explain the cause-and-effect relationship between rising wages and rising prices, or inflation. A statistical technique used to measure and quantify the level of financial risk within a firm or investment portfolio over No thanks, I prefer not making money. Content Library Articles Terms Videos Guides Slideshows FAQs Calculators Chart Advisor Stock Analysis Stock Simulator FXtrader Exam Prep Quizzer Net Worth Calculator.

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