0% daredevils chase 'free' cash

By Liz Pulliam Weston

Bruce isn't worried about his $50,000 credit card debt. In fact, he's making money from his balance.

The Annandale, Va., resident is one of an army of arbitrageurs -- consumers who invest money borrowed on low-rate credit cards. So far, he said, he's made more than $2,500.

"I used to get (low-rate offers) in the mail and assumed they were junk, so I put them in my shredder," Bruce said. "Then one day I was at home and bored, so I decided to take a closer look."

Bruce, who asked that his last name not be used, had read about others making money from low-rate offers, and realized that with his good credit rating and extremely high credit limits -- $110,000 on seven cards -- he could, too.

Now he eagerly searches his mail for so-called "convenience checks" that offer 0% rates for a limited time on balance transfers. If all the details are right -- and we'll get to some of those below -- Bruce writes himself a check for an amount that's $500 below the card's credit limit. He deposits the check into a credit union account that's currently paying 5.25% interest and sets up an automatic monthly payment so the card's minimum is paid on time. He calls the card issuer to find out exactly when the low-rate offer expires and makes sure to send a check in a few weeks before the deadline, using an Excel spreadsheet and computerized reminders so that he doesn't forget.

"Some of the offers … are kind of vague about when the low rate ends," he notes. Someone who blows the deadline and winds up paying an 18% rate on a $20,000 balance, even if it's just for one month, would wipe out any interest earned on the money.

"Your entire game is lost," he said.

A poster on the Your Money message board named dancinmama said she never carried a credit card balance until she was lured into the 0% arbitrage game by her own credit card company.

"I got started when a customer service representative for Chase basically called me and pointed out to me that my credit limits were high and how I had all this money available to me to do ANYTHING that I wanted without any fees or interest for several months," dancinmama wrote. "I got his number, hung up the phone and thought about it for a while. It didn't take long for me to call him back and get a balance transfer for over $45,000, and I was on my way."

She calculates she made $1,700 in six months on her first two deals. At one point, she had more than $100,000 on her credit cards at 0%, although currently her balances are around $85,000.

"I didn't fly by the seat of my pants, however," dancinmama wrote. "I asked questions on (the Your Money) board and I looked up Web sites that were suggested to learn what pitfalls there were in doing this. Soon I knew all the ins and outs -- all that was left to do was make the minimum monthly payments on time and collect the interest on the credit card company's money."

Watch your step

I'll say it right here: This is definitely not a game the typical consumer should play, since there are too many traps for the unwary. Use the wrong offer and you can get slapped with fat fees or a much higher interest rate than you expect, wiping out any benefit. Miss a payment and you get the same result: higher interest rates and fees that cost you money, rather than making it.

You need good credit to get these offers, and high credit limits to make much money. But chasing these offers can dent that good credit, as dancinmama learned. She was turned down for a Discover card because of the high balances on her other cards. (Maxing out your credit cards for any reason -- even if you can pay off the balance on a moment's notice -- can seriously ding your credit scores.)

That said, there's no denying that smart, careful, savvy consumers have been making money using credit card arbitrage. (Arbitrage is simply exploiting a difference in interest rates, by borrowing at the lower rate and investing at a higher one.)

Unfortunately, finding the right deals is getting tougher, said CardRatings.com founder Curtis Arnold, as interest rates rise and more savvy consumers take advantage of the offers. As recently as a year ago, for example, it was relatively easy to find fee-free balance transfer offers that lasted for up to a year. Declining credit card company profits, Arnold said, are causing issuers to be stingier.

Credit card companies are "definitely tightening up," Arnold said. "There are more fees, higher interest rates and the longevity of offers is declining."

The ingredients

A good place to put the money. Many credit card arbitragers use online banks such as ING Direct, Emigrant Direct or HSBC Direct, which offer insured bank accounts currently yielding 4.5% or more. Although I've heard from some folks who invest their borrowed money in stocks, I wouldn't recommend that; you want to keep the money safe so you can pay off your balance when the low interest rate expires. Short-term investments in stocks are anything but safe. (See the highest current offers for savings accounts, money market accounts and certificates of deposit.)

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