Cash-Advance Arbitrage
Mar 1st, 2007 by Wealth Builder [This post is written and copyrighted by Wealth Building Lessons (http://www.wealthbuildinglessons.com).]
Most of us have received checks in the mail from our credit card companies. Often these carry very low fees and 0% interest rates, sometime for as long as a year.
Some people have figured out a way to use this to their advantage. They borrow the money at a low rate and invest it at a higher rate, thus engaging in ‘arbitrage’.
The fees have to be very carefully calculated. You want to make sure you calculate all the hidden costs and come out ahead. Normally the cash advance fee has to be capped at a certain limit (like $50) so when you withdraw $5,000, it works out to 1% or less. Then you need to invest it in a CD or some online savings account where you can get around 4-5%.
You need to be really careful that you remember to withdraw the money from the bank and pay off your credit card before the promotional period is up otherwise you’ll be stuck with extremely high interest rates (usually 16-29%) that will cause you to end up with a loss instead of a profit!
If you enjoyed this post then make sure you subscribe to my RSS feed.
Related Posts:
- None
5 Responses to “Cash-Advance Arbitrage”
If you’re going to do this, you might want to make the first payment ahead of time, then automatically set up payments from your savings account that you’re establishing. This is because if you miss just one payment, the whole thing falls apart. 29% interest charges can set you back real quick.
But I like your thinking. Very creative.
Credit card companies know that for every one hundred 0% credit cards they issue, a certain number will go out and buy a big-screen TV and not be able to pay it back in time. They’re just like drug pushers as far as I’m concerned!!!
Just make sure you’re not applying for a mortgage when you do this. The balances will count negatively against your income and increase your debt-to-income ratio making it difficult to qualify for a loan.
Yeah, definately stay away from those.
GugaDizZ, drug pushers is an understatement in my mind