How to Turn $10,000 into $1,000,000

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creditcard.jpgThere are obviously a countless number of ways to invest money these days, however one is so fascinating we decided to test it out here at It’s called credit card arbitrage. It involves utilizing funds garnered from no interest credit card offers, and investing the money in various traditional avenues. Here’s how it works....

Summarily speaking, it's the usage of no interest credit card offers to invest interest free money during the term of the offer. It's essentially like taking out an interest free loan to invest with. It's an absolute no brainer to the extent that the credit card company gives you money completely free for an entire year, and you can do with it what you want. 99% of people use it to buy "stuff", and then a majority of those people go on to not pay it off by the end of the year, fail to transfer the balance away to a new no-interest offer, and then pay some outrageous interest rate on the remaining balance. This is how credit card companies make money off these offers. It happens more than the smart investor could likely ever imagine, and that's why you get these 0% credit card offers in your mail almost daily. Understanding the motivation behind these offers, however, simply makes the opportunity to smart investors even more obvious. As long as you transfer the balance to a new card or account before the no-interest period runs out, or even just pay it off, you can profit off of literally every single penny you earn on that money you invested. Here's a basic example:

You get a promotional mailer offering 0% interest for 12 months on purchases and balance transfers. You apply for the card, and are approved for a credit limit of $10,000. You then take that $10,000, interest free for one year, and deposit it in one of the ever-growing list of online banks that offer great savings account rates. Let's say you pick ING. You deposit the money, sit back, and earn 5% over the course of the year. At the end of the promotional period on that credit card offer, you turned the $10,000 they gave you, interest free, into $10,500. That's $500 for doing absolutely nothing. If someone came to you today and said "I'm offering to pay you $500, one year from today, for doing absolutely doing nothing," what are you going to say? No? Exactly. And of course, say you decide to transfer that balance to another no interest credit card offer for another year, and you keep your money in the same account, continuing to earn interest. At the end of the next year, you now have $11,025. That's a pure profit of $1,025 for doing absolutely NOTHING. And of course, due to the time value of money and the wonder of compounding interest rates, you can continue this course into infinity, all the while making money. It's literally that basic.

Now, while it is that basic, it's obviously not that simple. There are a lot of things that have to happen for all of this to work, but the good news is that it's easy for these things to happen. First, you have to have good enough credit to get these offers in the first place. That's kind of a no-brainer, and honestly, there's nothing else we can tell you about this one. If you have bad credit, bookmark this article, fix your credit, and come back. Second, you have to find the right card. Depending upon the credit offer, it's a bit difficult to get up and running at first. A majority of cards will offer you either 0% on balance transfers (make sure to pay special attention to the fine print, and avoid the 3% balance transfer fee if possible. If not possible to avoid, at least pick one that maxes the fee out at between $50 and $75) or 0% purchases, both for a year. If you have a balance that you were planning to pay off, you can then transfer that balance under these offers, and use the cash you were planning to pay the balance off with to invest. This is not usually the case, however. Usually, with most cards, you'll have to use the 0% purchases feature. For as long as it takes to work up towards the credit limit, use the card for all of your purchases. Put everything you can on the card (that you would have normally spent -- this is crucial. It is NOT the time to spend beyond your means), and then "pay it off" every month. But by "pay it off" we mean, take the money that you would have paid to the card, and invest. This might take several months to get up to the credit limit, but either way, you can turn your everyday purchases into the cash to invest.

There is a better way, however. After doing minimal research, we found a credit card company that actually allows you to use the balance transfer feature to pay yourself. You can literally send a check to yourself as a "balance transfer." It's phenomenal. This is by far the best way to get your credit card arbitrage game up and running. The card company is Citi Cards. We're not tied in any way to Citi, but since it was the only one we could find (there may be others, but we didn't spend too much time looking) that actually allowed you to get cash through the balance transfer feature (instead of through a cash advance, which usually incurs huge fees -- be wary!). Just google "no fee balance transfers" and then look for any Citi card. Every one we looked at had that feature, and it allowed us to begin the credit card arbitrage, for the full balance, right away.

So, if you're still not inspired enough to take advantage of LITERALLY FREE money, we'll run you through an experiment that we're currently taking part in here at boozwatt | business.

One of our editors drew the short straw and was forced to pony up his credit for this experiment. In his name, we signed up for 7 no-interest credit card offers. We did as many as we could from Citi (they have tons of different cards, and apparently you can sign up for all of them simultaneously, yet separately - e.g. Citi Cash, Citi Professional, Citi Business, etc.). His total credit limit from those 7 cards was $65,000. Because we were messing with his personal credit and money, we decided to play it safe, like discussed above. See a little further down the article for our look into the effect of better investments.

We took his $65,000 and put it into a regular online savings account, this one from Capital One. It's a standard account like any other, and for the past three months we've run the experiment, has had a stated yield of around 5%. At 3 months  into the experiment, his account balance is currently sitting at $65,822.44. That means he has officially made $822.44 over the past 3 months. Not too bad for doing absolutely nothing (we even set the accounts up for him, so he literally has done nothing). So, at this rate, at the end of the 12 month period, his account will be sitting nicely at $68,282.50. That's a tidy little profit of $3,282.50 for not lifting a finger.

This experiment has really gotten us thinking about the bigger picture. If done right, this is essentially like trading on margin, but with no fees or interest. Imagine doing what we discuss above, however investing it as you would any investment (e.g. mutual funds, etc.). Obviously this is quite risky -- with online savings accounts, there is no risk of losing your principal balance, however there is no such guarantee with securities. You could lose a huge chunk of money that you never actually owned. And imagine if you couldn't acquire new 0% interest accounts when your current ones are set to expire -- you would need to pay off the balances with money that you never had. A terrible predicament indeed.

For the sake of literary curiosity, let's take a look at what our editor's account would look like if we put him in a mutual fund for the next 1-3 years. Let's say, further, that he was lucky enough to average over that time period an 8% return. Here's what his account would like:

End of first promotional period (12 months in): $70,200
End of second promotional period (24 months in): $75,816

End of third promotional period (36 months in): $81,881

In 3 years he would have made $16,881. Are you beginning to see? This exercise in the time value of money really illustrates how rich people get richer. While the average American has their money sitting in their normal savings account (earning either nothing, or next to nothing), or even worse, sitting in their home, people with loads of cash are letting their money earn them money. It's almost laughable that this actually works, but it does.

Now that we've taken it this far, we're intrigued. Let's say that instead of 8%, our editor is able to average 10% annual return on his money. Let's see how his FREE $65,000 would look then:

End of first promotional period (12 months in): $71,500

End of second promotional period (24 months in): $78,650

End of third promotional period (36 months in): $86,515

In 3 years he would have made $21,515. Crazy. Finally, we'll run this one more time, with an even more unlikely return of 12%:

End of first promotional period (12 months in): $72,800

End of second promotional period (24 months in): $81,536

End of third promotional period (36 months in): $91,320

3 years, $26,320 in profit. At that point, he could just cash in his investments, pay off his credit card balances (which he has now transferred a total of 3 times), or he could keep it going. How long would it take him to make enough to pay off his credit card balances and still have his starting capital (the original $65,000)? A little over 6 years. In six years he would have paid off his balances, and still had the original amount in cash.

We could keep this up forever (how much would he have after 20 years? $627,009) but it isn't necessary (30 years? $1,947,394). You get the point. If you've been a good enough economic citizen, you should be able to profit from your solid credit score. Why else do you have it? What good does it do you? Honestly, how many times does it really benefit you? How many times do you buy a house, a car, or some other very large purchase? It's time to take advantage. Oh, and a word of advice: stick with the online bank. No need to gamble with your money when it's so easy to profit for free.

One final thing that we think goes unsaid, but maybe not. There is absolutely NO better use of credit card arbitrage than to pay off existing debt. If you've read this far, and you have any credit card debt, stop reading right NOW, and sign up for some of these interest free credit card offers (again, be sure to watch out for balance transfer fees (never pay more than a maximum of $75) and annual fee cards). Get those balances transferred. You absolutely cannot match the guaranteed return of paying off interest bearing credit cards. Think of it this way: by using the interest free balances to pay off interest bearing accounts, you are essentially making that much money (because otherwise you would be paying it, and now you're not). The average credit card interest rate today is around 14.5%. That means that by not having to pay that amount, you are literally earning 14.5% on your dollar. That's so outrageous a guaranteed return, we didn't even run that scenario above. Say you have $20,000 in credit cards and (hopefully) you have enough good credit to get balance transfer cards for that amount. If it would have taken you 5 years to pay off those cards (you still have to pay them off the same now even though they aren't accruing interest, by the way), you just avoided $19,360 in interest. In 5 years. In FIVE years, you essentially doubled your money (give or take $640) by not having to pay the interest. That's staggering. Amazing. And it can be done. Good luck, and happy investing. 

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BizBlogged1 said:

People hate Credit cards as they are the prime reasons for head-ache with their hidden costs.. But after reading this one should change his mindset and if he follows he would earn more money...

Finance blog, Finance, Economics, Corporate Finance, Personal Finance, Investing and Marketing

Oswald said:

Credit card arbitrage is rampant and an excellent way to build credit and generate passive income. You might as well take advantage of the system before it takes advantage of you.

Another arbitrage opportunity using the US Mint's Direct Ship Program

Credit card is not bad if we only just use it on purpose or for specific purposes to avoid debts

One24 Author Profile Page said:

Credit card is like Italian Love Phrases they synch with
Italian Numbers

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This page contains a single entry by the boozwatt team published on December 5, 2007 4:56 PM.

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