MARCH 14, 2023 BY JONATHAN PING25 COMMENTSMy Money Blog has partnered with CardRatings and Credit-Land for selected credit cards and may receive a commission. All opinions expressed are the author’s alone, and has not been provided nor approved by any of the companies mentioned.
Recent events have reminded us that banks make money by taking in deposits at low interest rates and reinvesting those deposits at higher interest rates (either bonds or directly making loans themselves). When you see a credit union have a certificate special, that usually means it needs more deposits to fund commercial, residential, or personal loans to its members. This is a form of arbitrage. (Usually this works just fine, as long as your depositors don’t try to ask for all their money bank at once.)
With short-term interest rates now at 5% again, this brings back the possibility of credit card arbitrage to individuals. Borrow money with a no or low-fee 0% APR balance transfer, invest it in FDIC-insured banks at 5%, and you have significant rate spread. At that spread, borrowing $10,000 will make $500 a year, while borrowing $50,000 will make $2,500 a year.
Back around 2005, I was pretty heavy into this game as it was the equivalent of a 10%+ increase in my annual income. I knew all the ways that I could turn a balance transfer into cash. Some issuers gave out balance transfer checks, other issuers let you direct deposit a balance transfer into your bank account, and finally I could also transfer a balance larger than my actual balance and then request a credit refund via check. For example, I might have a $2,000 average recurring monthly balance as a regular customer at Bank A but then request a $12,000 balance transfer from Bank B. That would leave a negative $10,000 credit balance at Bank A, which they would send back to me as a check.
Interest rates have been very low for a very long time, and I haven’t used a balance transfer for a very long time. (There is a reason why credit card companies will give you 0% APR for 21 months, and it isn’t because they are nice people who enjoy giving out free loans. It’s because they get to charge you 24% interest after that introductory period.)
So, I ask you kind and intelligent readers: Has anyone tried to obtain cash directly via a credit card balance transfer recently? If so, what was your experience? What worked, what didn’t, and with which card issuer?