Balance Transfer Arbitrage

The idea of a balance transfer arbitrage seems like a win-win proposition right? You get a cheap, if not 0% interest, loan and then deposit it in a bank where you can earn more than 0%, sometimes much more (like over 4%). Borrow money low, lend money out high, and your borrower is 100% guaranteed by the FDIC. Are there any risks? The answer is Yes, but most of those are the borrowers fault, not the environment.

Risk 1: You Get Greedy
Sometimes 4% isn’t enough and people decide that they’ll put it in the stock market or into a mutual fund. Or they bet on something with the funds, just anything that isn’t 100% guaranteed like a savings account. This is the number one reason why the balance transfer arbitrage backfires and when it backfires in this way, it backfires supremely. When that promotional interest period ends, the interest that comes on afterwards is like a firestorm. Trying to pay back thousands of dollars with a double digit interest rate is really really hard and it’s made worse by the fact that you have nothing to show for it. This is the number one risk and if you are able to take the guaranteed winnings and go home, then balance transfer arbitrage is for you. If you can’t, do not do this play.

Risk 2: You Get Sloppy
If you miss a payment, expect your interest rate to go up to the regular double digit interest rate. If you forget when your promotional period ends, you’ll probably get dinged for a month’s interest before you scramble to pay it back. While neither one of those things is a major deal killer, they do cut into your earnings significantly. Miss the first payment? Consider yourself having just wasted your time and a perfectly good arbitrage opportunity. Miss the final payoff? You lose a little of your earned money, no biggie. These are not as bad as Risk 1.

Risk 3: Your Credit Score Is Important
If you’re going to make a major purchase on credit in the near future, I wouldn’t do the balance transfer arbitrage because you’ll be opening up a lot of new lines of credit, increasing the amount of credit you have, increasing the amount of debt you have, and increasing your credit utilization. All this will ultimately mean that your credit score will fall and it will fall a lot. Not to worry, when you pay everything back then your credit will be perfectly fine, if not better than before. However, in the interim you will take a hit in your score which will increase the cost of loans should you need them. My personal opinion, and you can take it for what its worth, is that if you need a loan within the next year, avoid balance transfer arbitrage because the increase in interest will make your earnings seem like a drop in the ocean.

There you have them, the three main risks of a balance transfer arbitrage play. There are certainly more but those are the big three you must be aware of before you undertake this endeavor.