Let’s say you borrow money, and pay a low interest rate, like 1% or 2%, and then pay it back after a year. You’d then be down that 1%-2% on the deal, right? And even if you somehow could borrow money at 0%, that’s just break even, right?
In a sense, yes, but in a sense, no. Because what this ignores is that having the use of the money has value too.
Think about how banks make money. Let’s say you have a savings account paying you 2% interest a year. Ultimately however much money you deposit with the bank, you eventually take out more. So do they lose on the deal? No, because in effect what they’re doing is borrowing money from you and paying you interest on it, and then lending it out to others and collecting a higher rate of interest from them.
What some consumers have discovered is that you can use this same principle to make money using credit cards. If you can borrow money using credit cards at a lower interest rate than what you can make with that money while it’s in your possession, then you come out ahead.
Credit card interest rates tend to be higher than most other forms of credit, so at first glance this seems decidedly unpromising. But that’s the standard interest rates. Promotional rates are often quite a bit lower, all the way down to 0%.
There aren’t nearly as many such deals available now as even a few years ago, perhaps in part precisely because savvy people realized they could work the system-honestly, legally-to end up ahead of the game. So this way of making money isn’t as lucrative as perhaps it once was. But there are occasional solid promotional offers out there, especially for people with very good credit scores.
What you need to get the ball rolling is a card with the lowest possible introductory rate for cash advances. If nothing like that is available, then the lowest possible introductory rate for purchases. In either case, remember to take into account not just the interest rate, but any fees. (Cash advances are especially likely to have fees, though not all the time.) If you can get a really good offer on cash advances, pull out the maximum.
If it’s only good for purchases, you have to be careful, but in principle you can achieve roughly the same thing. Certainly don’t spend more than you would have spent if you hadn’t obtained the card-that defeats the purpose-but anything you were going to have to spend anyway, buy it with the card instead. Consider the money you would have spent for it the equivalent of a cash advance.
For instance, let’s say you have to make a $400 car payment every month, and you’re allowed to pay by credit card. Normally you just send a check. But put that $400 on this credit card with the great introductory rate instead, thereby freeing up the $400 in liquidity you would have mailed in in the form of a check. It works out like you’d taken a $400 cash advance on that card. And then just do the same for all your other purchases.
OK, so either through hopefully a cash advance, or a more complicated series of purchases, you now have a certain sum of money in your hands, as well as a debt at little or no interest to pay back in six months or a year or whatever the introductory period is. (And of course you’ll have to make token monthly minimum payments along the way, not pay it all back in a lump sum after the introductory period.)
If you then invest that money in anything that returns more than that 0% or 1% or 1.9% or whatever was the best introductory offer you found, that’s your profit. That could be a simple savings account, a mutual fund, bonds, a business, heck maybe you’re a great poker player. Just something that pays you back more than that tiny interest rate you’re paying for the money.
Especially if the introductory period is fairly short, like six months, your gain will likely be quite modest. But at least it’s something.
Importantly, you don’t have to stop there. Really good interest rates on purchases are tough to find these days, and on cash advances even tougher, but what’s somewhat easier to find are really appealing terms and interest rates on balance transfers, as credit card companies try to take business away from each other. So instead of simply paying back what you borrowed when the introductory period ends and being satisfied with your modest gain, you can instead transfer the balance to another card, if anything probably at a better interest rate, and start the clock going again. While the second credit card company is holding the debt, you can continue making money off your investment with, again, your profit being whatever you’re making that is in excess of the low or zero percent interest rate you’re paying to this second credit card company.
Then just keep doing that as long as you have opportunities. You might think it still won’t last all that long because you’ll soon enough run out of cards, but you may find you can use some of the cards more than once. That credit card company that you used for the initial cash advance, where you then transferred your whole balance to another card? They may well contact you a year or two or three later, saying that if you happen to have any balances on any credit cards, they’d sure like you to transfer them back to them, “And if you do, you’ll pay just 0.9% interest for the first ten months.”
Of course you have to have the utmost discipline to do something like this, because you still have to pay the money back. You’re just delaying it as long as possible while you earn money on the funds you’ve borrowed. But you can’t spend it obviously. You can’t treat it as “your” money. It’s money you’re borrowing to use temporarily to profit from, and then paying back.
Remember, just think of yourself as being like your bank. Yes, you’re probably paying interest to borrow this money, but you’re then lending it out at higher interest.