Some of you may be familiar with the idea of credit card arbitrage. It’s been discussed on My Money Blog and on The Consumerist and is a frequent subject of rumination over at the FatWallet forums. Basically, credit card arbitrage involves using a balance transfer check from a credit card with a 0% APR to forward yourself some cash, then placing this cash in a high-yield savings account and raking in wads of interest. I can personally vouch for the viability of this scheme; I myself made nearly $2000 last year by playing the arbitrage game.

I do not recommend that you engage in credit card arbitrage if you have trouble paying off your cards each month. You’ve got to be anally on top of things and read all the fine print and if you don’t trust yourself to sock away the money and not touch it then you’d better keep far away. If you do have the disciple to sock away the cash, credit card arbitrage can be quite profitable.

But this post is not about credit card arbitrage. It’s about a new and exciting credit card game that has the potential to produce great profit for those willing to read the fine print and experiment and take on a little risk (mostly, the risk that you yourself will screw up and the whole house of cards will collapse). I realize that people are going to flame me for suggesting something “risky” to my readers, so if this idea sounds unappealing or dangerous to you, just don’t do it. You’ve gotta trust your instincts.

Nevertheless, I think this scheme is fascinating and it certainly has the potential to make you some serious cash. Feel free to correct me if I’m wrong, but I’ve never before seen a similar scheme discussed on an internet forum or blog.

The Basics

Okay, so here’s the basic idea behind this new credit card scheme. You’re aware of cash back credit cards, right? Y’know, the kind Dave Ramsey warns listeners and readers away from (I happen to disagree with him)? The kind that’ll give you anywhere from 1-5% back on your spending?

Well, you find a way to run tons of purchases through your cash back card and then pay all of them off before the bill comes due. You pocket the cash back. If you can somehow convert those purchases into cold, hard cash, you can put the cash in a savings account and pocket the interest, taking advantage of credit card arbitrage as well. You could literally make thousands of dollars a year this way, but there are, of course, a whole bunch of details you’ll have to attend to…

The Details

Let’s start with the biggie: how exactly do you “run tons of purchases through your cash back card?” You could try to buy something you know you could resell and break even on, but unless you’ve hit on the deal of the century, that’s probably too risky, and you wouldn’t be able to profit by placing the funds in an interest-bearing bank account. Instead, I’d suggest purchasing a cash equivalent as the best way to retrieve the funds from your card.

A money order is one type of cash equivalent. Unfortunately, there aren’t many places that’ll allow you to purchase a money order using a credit card. Western Union won’t do it, nor will most banks, nor will the post office. The reason for this, I think, is that there are costs involved in issuing the money order and there are also costs involved in accepting your credit card. Businesses already make a set amount of money - not very much - on each money order, and the merchant’s credit card acceptance fee would seriously eat into or eliminate that slim profit margin. If you can find a place that will let you purchase a money order with your credit card, there you go! I’ve heard that some grocery stores will do this, but you’ll have to look around. Also, you must ensure that the money order fee does not cancel out the cash back you’ll receive, and I would want to double-check that your purchase will not be counted as a cash advance (which would generally mean you’d be slapped with absurdly high fees, whereas purchases, of course, are fee-free).

Additionally, a My Money Blog reader recently pointed out that you can purchase dollar coins from the US Mint with no fee whatsoever, and free shipping to boot! Feel like annoying your bank by depositing hundreds of dollar coins? There you go! There appears to be a $500 limit on orders, and I’m not sure how the Mint would react if you were to place ten or fifteen such orders, nor what your bank would think. Perhaps they’d suspect your deposits were part of some kind of money laundering scheme. I don’t know. For the sake of science, somebody out there has to try it!

Can anybody else think of a creative way to purchase a cash equivalent using a credit card?

It is important to note that this scheme would carry the same risks as credit card arbitrage. You’d have to have enough discipline to simply toss the money in the bank account and not spend it frivolously on something, and you’d have to watch the due dates for the cards. If you missed a due date, you could be in big trouble. Your interest rate could increase and you’d almost certainly be slapped with a high late fee, plus your credit score would get dinged.

How Much Can You Earn?

This simply depends on which cash back card, or cards, you’re carrying. The best cards are those which impose no limit on the amount of cash back you can earn, such as the Citi Cash Returns card and the Discover More card. Most cash back cards offer just 1% cash back on everyday purchases, so let’s say you get a hold of a couple of cash back cards with no limit on the amount you can earn and that each one gives you access to $10,000 worth of credit. If you use each card to its full capacity each month, you could make $2400 a year - and that’s from cash back alone. I haven’t included the interest you could make by placing the money into a savings account, i.e. engaging in arbitrage. It’s too hard to calculate the potential benefit from this due to changing interest rates and other factors. However, I think you could easily make something like an extra $1000 from the arbitrage aspect of this scheme. All in all, depending on a number of factors, you could make at least a few thousand dollars a year this way. Enough to max out your IRA contribution, say. And that’s nothing to sneeze at.

Am I Actually Gonna Do This?

I think so. The dollar coins are currently on backorder, and I’d like to see that situation remedied before placing too much reliance on the US Mint. I also need to check into the money order situation at stores in my area. Since I’m currently using my cash back credit cards for arbitrage, I’ll at least wait until the 0% APR fun ends before putting this new scheme into motion, but I do plan on at least trying out a small-scale test run. We’ll see what my bank thinks about getting rolls and rolls of quarters at the deposit window. I can just see the faces of those befuddled bank tellers now!

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