Hello, Dinks. I know many of us have credit cards. Some people use them for every purchase so that they can rack up award points. Some people use them for emergencies, while others use them for something called credit card arbitrage. You might be wondering what credit card arbitrage is.
According to Investopedia, credit card arbitrage is when someone borrows money at a low interest rate from a credit card, then investing that money at a higher interest rate to try to make a profit. One of the most common types of credit card arbitrage happens when someone takes advantage of a credit card that offers 0% introductory APR balance transfer. People can get a cash advance for thousands of dollars depending on their credit limit. The 0% introductory period lasts between 12-15 months. The borrower would then use that money to invest in a high-interest savings account. If the borrower makes the required monthly payments on the credit card and repays the balance before the introductory period is over, they can turn a profit.
Is credit card arbitrage smart?
In my opinion, credit card arbitrage is not a smart idea. There are too many things that could go wrong. You might forget to make a monthly payment and incur a late fee. If that happens, your 0% introductory rate may be a thing of the past. Also, if your credit is getting pulled too often, it can impact your score. Your credit utilization ratio will also be affected.
What are some better ways to invest?
As I stated earlier, I don’t believe that credit card arbitrage is worth it. Below are some better ways that you can invest.
If your company has a 401k, sign up for it immediately. If you don’t want where to start, contact your human resources office. Your 401k is a retirement savings ln sponsored by your employer. It allows workers to save and invest a part of their paycheck before the taxes are taken out.
Mutual Funds are a good place to invest. They give you access to several different investments. The amounts that you can invest will fluctuate per company.
Rental properties are usually great investments. They take a little more money to start than the previous investments, but they are worth it if you have the funds. When deciding on a rental property, you have to figure out which area you want to get the property, the demand for housing and the type of housing (single, duplex, etc.). I want to eventually acquire some rental property once I get out of debt. That’s something that I’ve been thinking about doing for a while.
As you can see, some of the other investment options are a tad bit better than credit card arbitrage. I’d rather invest my money in a 401k or mutual fund instead of trying to get an extra $50 – $100 by doing credit card arbitrage. In due time, you can see good returns from them.