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Disclaimer: None of this should be taken as financial advice. You should do your own research or consult your financial advisor before trying any of these strategies.

Today I came across a strategy which I call credit card arbitrage. Among personal finance bloggers, they refer to this as App-O-Rama or AppORama. In a nutshell, here’s what it involves. You apply for as many 0% balance transfer credit card offers as you can find. In order for this to work, you will need to have an excellent credit score so that you can qualify for the 0% and a high credit limit. This isn’t for the weak of heart.

Okay, before you think that I’ve gone nuts, read on.

Here’s how the arbitrage works:

Sometimes, credit card companies send you blank checks that you can use for any purpose. The idea is that you write yourself a check using your existing credit card and transfer that balance to a 0% interest credit card. The next step is to find an internet bank with a high interest yielding checking or savings account and transfer that money in there. So you’ll earn, say 5% in the account and before the time limit for the 0% offer is up, you pay back the credit card in full and you get to keep the interest as your profit.

It’s equivalent to an interest free loan during the period of the 0% interest rate. So let’s say you put $10,000 in an account earning 5% per year. At the end of the period, you pay off the original $10,000 and keep the interest. Before taxes, you’ll get about $500. (I’m not including compounding interest so in reality the total will be slightly higher.)

There are other ways to benefit as well. Look for 0% credit card offers that include some sort of rewards or cash back offer. Transfer your balance to the card and you’ll be able to earn free miles for a ticket or some other reward.

In theory, this seems to work. However, the reality is that you have to consider the risks and drawbacks.

Make sure there isn’t a balance transfer fee. Read the fine print. Some cards will charge you a percentage of the amount you transfer. This fee may end up eating away most of your profits making it not worthwhile for you.

But more importantly, your FICO score will take a hit. When you apply for a new credit card, the company will order a credit check on you. Credit inquiries tend to bring down your credit score. So if you’re planning to buy a house soon, my advice is to stay away from this strategy.

Also, with more outstanding credit card balances, your debt to credit limit ratio will increase. Try not to max out your credit limit. An increased debt/credit limit ratio will also bring down your credit score.

Finally, having more new credit cards in your credit report will also decrease the average age of your credit account and end up hurting your credit score.

Having said that, getting a 0% balance transfer credit card may not be a bad idea if you’re heavily involved in PPC. It helps with the cash flow. Since you have to wait a month or two for most companies to pay you, you can use the balance transfer to offset some of your advertising costs. The side benefit is that you can rake up some serious points or air miles using this technique. If you’re using a credit card with cash back, you’ll get 1% of your advertising cost back. If you’re spending $100,000 per year, that 1% is an extra $1000 in your pocket.

Technorati Tags: App-O-Rama, AppORama, 0% interest credit cards, 0% balance transfers, PPC, credit card arbitrage

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