Credit Card Arbitrage – Get “Free Money” From Your Credit Limit

If someone wants to loan you a sum of money for around 3% p.a, how much would you borrow?

Personally speaking, my answer would be “as much as possible”. In today’s interest climate where one can easily get 4 to 5% p.a. in returns from virtually risk-free avenues like bank deposits and government treasury bills, a 3% p.a. loan is as good as “free money”… subject to a few caveats, of course.

The equation is simple: borrow at a low rate + put those money in a high-yield bank = earn the difference

The next question would now be, “where can we get a loan this cheap?” and I think I’ve found this answer as well.

What’s a balance transfer?

The tool right now is a credit card balance transfer. Find the right banks (see below for a few I found) and you can get interest rates under 3.5% or even 3% p.a.

For the uninitiated, a balance transfer allows you to borrow against your credit card limit up to a maximum of 95%. This means that if you have a credit limit of S$20,000, you could withdraw S$19,000 as an unsecured loan.

The words “credit card” and “debt” should invoke a sense of aversion, and rightfully so; credit cards charge as high as 25 to 26% p.a. interest. The deal here though, is that balance transfers are typically interest-free for a short period, usually between 3 to 12 months. It’s not completely free, of course, and usually comes with a processing fee depending on the tenure you select.

If you chose a 6-month tenure, what happens is that you get the cash disbursed to your account of choice, and you have to pay a minimum amount each month. The repayment is usually 1% to 3% each month, and if you do so, there is no interest or other fee to be paid. As with credit card statements, if you fail to make your payments on time, there are hefty late fees to be paid, so you must avoid missing out on a payment.

At the end of the interest-free period, you will have to return the remaining loan in full, or pay the crazy interest rates your credit card charges.

Here are some cheap options

Just like how banks like to focus on large numbers when it comes to marketing their “10% cashback” cards, they are equally delighted to highlight “0% interest” or the processing fees which can look innocuously low. The good thing is that banks are required to publish the effective interest rate (EIR) of loans, and one can easily see the actual interest being incurred.

I have found a few cheap 6-month options:

Company	Processing Fee	Effective Interest Rate
StanChart	1.5%	3.10% p.a.
Citibank	1.58%	3.65% p.a.
UOB*	1.18% to 1.38% (depends on amount)	2.53% to 2.96% p.a. (depends on amount)

What do I do with the funds?

Once you get the funds, you need to get returns on your processing fee, and then some for a profit. There are many relatively low risk avenues to get decent interest rates these days, and they probably need no introduction.

But if you do need some suggestions, I think bank accounts like UOB One or OCBC 360 are an obvious choice.

With a tenure of 6 months, t-bills also fit the, well, bill. You have to be a bit careful with this as your t-bill might mature after the interest-free period of your balance transfer is over. Time it properly, or prepare some cashflow to pay off your balance transfer first in the even your t-bill still has a few days left to mature.

I elaborate more on the options as well as calculation in my video:

What to take note of?

Just like a kitchen knife or hammer, credit cards and balance transfers are tools that can help us achieve certain goals, or cause a lot of harm and damage. It is important you know that there are some things you need to take note of.

Potential fees
As I have mentioned earlier, you shouldn’t miss your monthly repayment. Virtually every credit card charges an exorbitant fee for late payment, and may even impose interest when payments are missed. This would wipe away any potential earnings you were set to get in the first place.

Set up a GIRO payment instruction, or at least use a reminder app so you don’t forget to make payments.

Your instrument of choice could decrease in rates
While you profit from a 3% p.a. loan by putting the funds in a bank account for 5% p.a. returns, your bank could decide to decrease the rates. Based on my experience, banks usually give a month’s notice for rate drops, but that might not always be the case.

This is also why longer loans are riskier; the processing fees tend to be higher, and there is a bigger possibility that interest rates could drop over a longer time period.

You cannot have unsecured loans more than 12 times your monthly income
Note that there is an MAS rule that you cannot have unsecured loans (which include balance transfers) exceeding 12 times your monthly income. Thanks to SL from the group chat for pointing this out.

As with all things finance, do your research
This is not personal financial advice, and you should do your due diligence before committing to something.

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