I saw an advertisement for the MBNA Platinum Plus® MasterCard the other day. The ad proudly proclaimed that their card offered a 0% interest rate. Naturally, I assumed there was a limit to this generosity. There’s always a catch. “Perhaps the 0% will end after six months,” I thought, “Or maybe there’s a huge annual fee.”
(Before we get too far into this article, please keep in mind that the best credit card deal in Canada is also issued by MBNA, but this is not the same card that I’m talking about today).
My head swam with possibilities. No, I didn’t want to transfer a balance to this card. (I eschew debt, remember?)
I was excited by potential profit. I wanted– and, for a brief moment I thought I’d finally get the chance – to engage in “credit card arbitrage”.
What is credit card arbitrage? It’s where you take a “low interest” credit card offer, invest the money (at a higher rate of return than the interest rate charged by the credit card) and enjoy the profits. I wanted to take this 0% credit card money and stick it in my 2% Ally bank account to earn interest.
“Arbitrage” is a financial term. It refers to taking advantage of a disparity between two markets. Essentially, you capitalize on a difference in the price of a good (in this case, the “cost” of cash, which is the interest rate) between two markets (in this case, the credit card market for cash and the Ally bank market for cash).
Needless to say, I was pumped. On a $50,000 credit limit, I’d make $1000 in a year for doing next-to-nothing. A credit limit of 50 large might seem like an insane limit – it is. It might also seem unbelievable, but I have another MBNA card on which I was given a ridiculous limit that I refused.
After paying my taxes on my $1000, I’d still be left with a handsome profit of $700 (well, maybe more like $650) – again, all on a riskless arbitrage operation (if the cost of money is 0%, then fluctuations in interest rates at Ally Bank could never create a loss and, in the event of financial calamity, Ally is insured by the Canadian Deposit Insurance Corporation or CDIC, which is Canada’s version of the FDIC).
I clicked on the “Live Chat” feature to get the straight dope. Here’s the transcript:
Welcome to a live chat session. Please hold while we connect you to the next available Application Specialist. Your chat may be monitored and recorded for quality purposes. You are number 1 in a queue of 1. Thank you for your patience.
You are now being connected with Patterson, an Online Application Specialist.
you: How long would I get the 0% financing for?
Patterson: Hello, I am here to assist you today with your on-line application. May I have your name please?
Patterson: Hi Joe.
you: Hi Patterson.
Patterson: May I know are you referring to MBNA Platinum Plus® credit card?
Patterson: The promotional interest rate of 0% for the 10 months starts from the date your account is opened.
you: OK. Are there any fees? and how to I get the money from the account?
Patterson: There will be a Transaction fee it is 1% of the amount or the $7.50 whichever is greater and it is just a onetime fee.
Patterson: You can obtain a cash advance from your account by using your credit card at an ATM, bank, or other location.
you: Oh, I thought it was 0%?
Patterson: May I know are you completing the application for the Platinum Plus credit card?
you: Well I was going to, until I found out that it’s not 0%
Patterson: Even this card does not come with annual fee on it, I wish you would like this card once you receive this card upon approval.
Patterson: You can transfer you balance form one card to another card.
you: well I wanted to take a card, withdraw the maximum amount of my credit limit at 0%, put it in Ally Bank to earn 2%, then pay it all back in the final interest-free month
you: Arbitrage; make some money on my good name/credit
Patterson: Well, you can apply for the card, as the credit limit will be decided by the bank, however it can go anywhere upto $100,000 upon approval.
you: Yeah but then I’d have to pay $1000. That’s not 0% money, that’s 1% money. Can’t mbna do math?
you: When I earn 2% on the money, my marginal tax rate is approx 30%, so I’ll only get 1.33333% interest [after this convo, I remembered that I could write off the interest, since it was incurred on a loan for an investment; but even still the 'deal' isn't very attractive]
you: and I only get to use the money for 9 months, so I’ll earn LESS than 1%. Then mbna will charge me 1%! That’s stupid!
Patterson: Its a normal Transaction fee for which will be charged if you make a balance transfer, Wire transfer, Access cheque or deposit and Cash advance once you receive the card upon approval.
you: so to access the 0% cash, I MUST pay 1%
Patterson: And it is just a one time fee.
Patterson: So do you wish to apply for the Platinum Plus credit card?
you: Yes, I wish to take advantage of 0% money. Unfortunately mbna is lying in its ad, because it is 1% money. Actually, it’s more per annum because the fee only covers 9 months, so it costs like 1.33333% annually. After 9 mos it’ll skyrocket to who knows what so the real APR is probably crazy
Patterson: Shall I provide you the link to apply for the Platinum Plus credit card or else you have it opened with you?
That was my first adventure into credit card arbitrage. I struck out.
I’ll keep an eye out, but it seems fairly hopeless. Has anybody else seen any real opportunities to profitably arbitrage credit cards?