Introduction
The credit card arbitrage is a process of investing the money borrowed from a credit card in an avenue that has the potential to offer a higher interest rate than what the borrower pays for the credit card. The least risky and popular kind of credit card arbitrage includes the benefit of no introductory year-on-year percentage rate transfer of balance offer to borrow a sum of money via a credit card for the span of the introductory period, which is generally 15 months.
The person borrowing will then park this amount in an instrument, which may provide higher interest than regular savings bank accounts. They may invest in money market instruments, such as bonds, certificates of deposit, or any other similar investment vehicle, which has the potential to offer a higher rate of interest.
Understanding Credit Card Arbitrage
Credit card arbitrage will not work in your favour if you go onto make just the minimum payments at the end of all billing cycles and payback the dues in full prior to the introductory offer being closed. The sum of money that you might make out of this strategy might not be a significant one and may not be worth the risk you are willing to take.
Borrowers may earn lesser than what they anticipated when they try their luck with credit card arbitrage. For instance, you borrow Rs 5,000 from a credit card at a rate of 0% and invest the same in a money market instrument offering an interest of 2% having a maturity period of twelve months.
At maturity, you would earn around Rs 100 as interest which is taxable. The take-home returns after applying capital gains tax may not make your arbitraged investment worth the risk.
A Drawback of Credit Card Arbitrage:
If you borrow Rs 5,000 from a credit card at 0% introductory offering and not able to make the minimum monthly credit card payment for some reason, then your chances of making the most of the credit card arbitrage are less. This is because you will be charged with a late fee and a certain interest will be charged, which negates your return on arbitrage investment.
