Interest Rate Arbitrage
Back in the day when interest paid in online savings accounts was much higher than ZERO percent, I thought I was a credit card hacker. I remember a time when I was able to earn 5.5% through my HSBC online savings account. I was in college at the time and was receiving plenty of credit card offers with an introductory 0% for 12-15 months.
One day it clicked that I could act like a bank and borrow at one rate and lend it at a higher rate. This was a true arbitrage opportunity.
ar·bi·trage. definition: noun. 1. the simultaneous buying and selling of securities, currency, or commodities in different markets or in derivative forms in order to take advantage of differing prices for the same asset.
I didn’t have a lot of money in those days, but I did have a good amount of financial aid that I used to pay for housing and tuition. So I devised a plan to pay for everything I could on the credit card (without incurring extra charges) and transferred the cash to my online savings account. At the time I was able to pre-pay my dorm and tuition cost for the year which just about maxed out my available credit in the amount of $8,500. Not sure what the bank was thinking giving a college student an $8,500 credit limit, but let’s just say I wasn’t complaining.
If you do the math I was able to pull in about $38/month totally passively. I know it’s not that much money, but in college that was almost enough for two $20 “all you can eat” sushi nights in downtown Fullerton(which I frequented weekly).
The exact dates are bit fuzzy. But I think I initiated this strategy sometime in late 2006 or early 2007, before the financial world started to implode. It was good while it lasted.
1st “intentional” venture back into hacking credit card rewards programs
After the financial world blew up and rates went to zero, this was no longer a viable strategy. So I hung up my hat.
That was until October of 2013 when I learned of a new way people were finding ways to extract free money from the credit card offerings. The first card I signed up for was a United Airlines Rewards Visa that waived the first year’s annual fee, gave 30,000 bonus points, and a $50 statement credit. At the time I was booking a flight to Northern California for my wife and was more than happy to save $50 by signing up for the card.
However, the bonus points ended up being a bust. We really don’t fly that often and actually didn’t have any other upcoming trips to use the rewards points for. This meant that the 2 complimentary lounge passes would go unused as well. So I cashed all the points in for a bunch of magazine subscriptions (Forbes, Time, Fortune, Fast Company, Money), the Wall Street Journal, the LA Times, and a Keurig. Okay, so maybe it wasn’t a total bust, but I had visions of traveling somewhere exotic for FREE. The problem was we had no real plans of going anywhere.
2nd accidental credit card hack
It’s no secret that we love dining out. Somewhere over the years I happen to get a Disney credit card. This was the same card that I had applied for and received 15 months of 0% APR during my days of interest rate arbitrage I described above. A time came when the 0% interest rate was coming to an end and I paid off the card in full, with the money I had stashed away in the online savings account with HSBC.
(As a side note, does anyone remember the online only savings accounts? You had to link it to a checking account and you would have to wait like 3-days to get your money. It reminds me of a funny clip from comedian Kevin Heart, let’s take a minute to have a few laughs before we continue)
That was fun!
Let’s get back to the story now. So I paid off this Disney credit card in full and continued using it for years (paying the balance in full every month). Then sometime in 2012 I realized I had built up a huge balance of rewards points on my Disney credit card (the card I was actually embarrassed to pull out in front of friends, because they always gave me crap about it). At first I was disappointed because I thought you could only use them at Disneyland. That was until someone had mentioned the Napa Rose restaurant that was at the Grand California Hotel. It’s a 4-star dining experience and one of those places that cost at least $200 for two at dinner.
Ah, but fear not, they accepted my points as payment. This was great news, especially since I had racked up about $1,800 in Disney dollars that I could now spend at this amazing restaurant. Lucky for me, my wife’s birthday was right around the corner. I made reservations and didn’t hold anything back when it came to ordering. The bill that night after tip (also left using reward points) was $350.
It was our first experience of what it would be like if money were no object for us. We milked that card and those reward points for about 10 different visits. We were not nearly as gluttonous as we were during our first dining experience there.
3rd credit card hack
After the United Airlines card was set to renew, I cancelled that card to avoid the $95 annual fee that was waived the first year and signed up for the Marriott rewards credit card. The offer on this card was 50,000 bonus points, a Free Night Voucher, and the first year’s annual fee of $85 waived. Oh, and we get a free night stay every year on the anniversary of the card opening (if we keep the card and pay the annual fee).
We decided to go with this card because we definitely stay in hotels more often then we fly. We have had the card for less than a year, and it has already saved us about $900. Let me share how we have used the points so far:
- We had family visit us last summer and they wanted to visit Disneyland. Not relevant to the credit card, but we have friends and family that work at Disneyland so we actually were able to get into the park for free. We knew it would be a late night and so I used some of our bonus points to book a room at one of the Marriott owned hotels across the street from Disneyland. They were going for $150/night, but we got it for FREE with the points.
- We were hanging out with some friends in Huntington Beach and knew it would be a late night and that driving home would be a drag. So we booked a hotel room, this time using our voucher that was good for a category 4 hotel (which also had FREE breakfast, SCORE). This room was going for $120/night.
- We have a wedding coming up in August where I happen to be a part of the wedding party, so we will need to stay in town for a couple days for different festivities including the wedding itself. So we found an actual Marriott that was 5 miles from all the action and booked 3 nights. The room was going for about $200/night ($600). You know what our cost was? ZERO!
All in this card has saved us about $900 for doing absolutely nothing different besides carrying around a different credit card to ensure we met the minimum to get the bonus points.
4th credit card hack
This brings us to my most recent and definitely intentional credit card hack. Vawt over at Early Retirement Ahead recently published a post about his credit card hacking side hustle and recommended the Chase Sapphire Preferred card. He is really taking full advantage of the lucrative programs that are out there with 18 different credit cards he is managing. That is a little more than I am willing to manage at the moment, but it works for him.
However, his post has inspired me to be a bit more aggressive and intentional with my credit card hacking activities. It’s FREE money for crying out loud!
With this card the deal is 40,000 bonus points, first year fee of $95 waived, a 5,000 point bonus for adding an authorized user, and best of all it comes with 2X points for dining and restaurants. This card was designed with me in mind, when you consider how much we like to dine out.
If you convert the bonus points to cash you are looking at $450 in FREE cash (use this link to sign up to get your free cash, it’s $500 now). When converted to cash they are worth 1 cent each. If you use them for travel then they are worth 1.25 cents each or about $563.
Doing some back of the napkin math, we spend about $500/month on dining out right now which with 2X points should rack up an additional 12,000 points alone over the next 12 months ($6,000 of spending at 2X points). On average we charge an additional $3,000/month onto our credit cards each month, which would result in another 36,000 points.
So if we use this card right we are looking at the following points for the year:
- 40,000 initial bonus for applying for the card
- 5,000 bonus for adding an authorized user
- 12,000 points earned from our dining out budget
- 36,000 points earned from regular spending
Total = 93,000 = $930 in FREE Cash
We can get a little better value if we use it for travel. But nonetheless, if we go the cash route that is not bad at all.
Now It’s a New Side Hustle
I had never really thought about this as a side hustle, mostly because it is rather passive beyond signing up for the new credit card (that is kind of ideal, no?). Now the only thing to manage is to cancel the card before the annual fee is due. But even if you forget you can always call and have the credit card company cancel the card and refund you the annual fee after the fact. That happened to me with the United card.
At this point we will probably only mess with one and maybe two cards at a time. But this is something I will now consider as a pretty effortless side hustle. I say maybe two cards, because with the Sapphire Preferred Card you can transfer the points very liberally. I think it may make sense to have my wife sign up for the same card to get the 45,000 bonus, and then transfer the points to one card and continue using the card as planned.
This strategy would actually increase the cash value from $930 to $1,380. Add that to the 3 nights free I booked for the wedding in August and we are looking at $1,980 of FREE MONEY!!!
[UPDATE: As this post goes live (this was written back in early May 2015), we have already earned the first 45,000 points and will be signing up for the next card in my wife’s name in the next week.]
This is all from regular spending.
If you think this sounds awesome, then you should check out the pros recommended by our friend Vawt mentioned above:
I have read some amazing stories about credit card hackers leveraging these programs, taking trips for pennies on the dollar. Do you take advantage of credit card reward programs? Any recommendations?
– Gen Y Finance Guy
Great article. Credit card hacking does take a little getting used to – if you’re a responsible user, it’s hard to wrap your brain around why this makes sense for the cc company. But if they’re going to offer, we’d be silly to refuse.
One added recommendation, which still hasn’t processed fully in my brain: you can often get the same exact credit card that you already have and get the bonus again. I did this earlier this year with a Citi / AA Platinum (50K miles x 2) – the cards were issued within 2 months of each other. I have a friend who alleges he got 4 of the same card on the same day. Something must be broken in the system (perverse incentives) for that to happen, but again, if they’re going to offer…
An an important aside, keep an eye on your credit rating if you get serious about this. Mine has gone UP as I’ve gotten a bunch of cards this year – I think the increase of unused balance is more than compensating for the new credit hits. Once I start cancelling cards if they won’t waive annual fees, it’ll be good to watch what happens.
Good luck and keep on hackin’
I totally agree that people should only do this credit card hacking or churning if they are responsible. I would never recommend anyone increase their spending to get this FREE money. But no reason not to get paid to spend the money you would have anyways.
That’s interesting about being able to turnaround and get the same exact card to get the bonus again. I noticed with the Chase Sapphire Preferred card that you have to wait 24 months since the last time you had the card. So when we sign my wife up we will transfer the points and then close my card in order to get the clock ticking.
Good call on the credit monitoring. I use credit karma to keep an eye on my score.
Cheers and happy hacking to you as well.
Thanks for the shout out!
There are definitely people out there than earn points or rewards and forget about them. That loss just makes me cringe!
I still like the Chase Sapphire Preferred card a lot. Besides the pure cash value, you can sometimes get an even higher rate or return by transferring to Southwest Airlines or United and booking a flight. The highest possible value is when you are able to use them for international flights (something I have not done yet). Either way, you always need to do the quick calculation and decide if you want to keep the points or use them at a lower redemption rate (like the $.01 for cashing out).
It is my pleasure to give a shout out. Thank you for seriously putting this on my radar. I had not previously given it much thought, but now I have another game to play.
For now I am just in it for the cash with the Chase Sapphire Preferred card. But I will definitely keep that in mind about using it for travel vs. cashing out. I did realize that the value is less when you get cash. But it is pretty amazing that they can pay $450 for every sign up, I would love to see the customer lifetime value analysis they did before coming up with that number.
I will be watching for tips on this from you :)
I absolutely love credit card hacking and have accumulated over 25 cards and over 1M points in the matter of about 4 years. I hadn’t really considered it as a side hustle but looking back I’ve earned at least $1K a year in rewards by doing it.
Just like you, I’ve made some rookie mistakes by cashing out some points for some magazines and such because I just didn’t have a plan for certain points programs. Looking back I just shake my head at my old self.
The Chase Sapphire Preferred is one of the best ones but I think it’s pretty comparable to the Barclaycard Arrival Plus World Elite MasterCard with 40k points sign up bonus.
Since I’m working towards financial independence and run a lean budget , I’m almost to the point where I don’t have enough expenses to keep applying for cards and meeting the minimum spend. Horrible problem to have right?
Wow! Lifestyle Accountant you are a serious hacker with 1M points.
I definitely plan to be much more strategic about the card I sign up with and how I plan to use the points.
Will have to add Barclay card to the list of cards to CHURN!!!
Right on for running so lean. But I have a question though, is there anyway for you to manufacture spending to get the bonus? Could add a new element of fun to the game without spending any money? Using Paypal person to person pay between you and your wife, girlfriend, friend?
Even with a transaction cost for using a credit card they is still arbitrage to be had. Meaning even if you had to pay 3% credit card processing fee that would still make sense to do it for a $450 bonus right? I would spend $13.50 to make $450 all day until I was blue in the face.
Just something to noodle :)
This one is really great! Credit card hacking would be really helpful especially when you are looking more ways to save money.
There are not many FREE lunches in this life. This is definitely low hanging fruit for sure. Takes about 5 minutes to apply for the card. So the ROI on time is pretty huge.
If you do the math in this example for just the $450 bonus you are earning an effectively hourly rate of $5,400/hour.
Glad you enjoyed this one.
This is incredibly crazy! As I was reading this post, I brought up to my fiancé the Chase Sapphire Preferred section (we love this card) and when he looked up our point balance – we have exactly 93,000 points! As a bonus we also use my Chase Freedom card (that was my first credit card ever in my name) to combine points as well. Our plan is to purchase our honeymoon flights, as well as two round trip flights to Europe next year with our points which we will easily be able to accomplish! Why not utilize the points wisely that you receive for using credit responsibly?! Also, when it comes to dining (I’m sure you may know about this already!) but each first Friday of the month you get 3x the points! That’s usually our main date night out for the month. :)
Hey Alyssa – that is a nice rewards balance. Have both you and your Fiance signed up for the card to get double the bonus points? Or is the 93,000 points for just one card?
Also thanks for the tip. I did not know that you got 3X points on the first Friday of every month.
Time to optimize date night
I wouldn’t consider myself a hacker, but I definitely have started getting into some credit card churning for the sign on bonuses. My credit score is very high, so as long as it stays that way I don’t mind opening new cards. I have a friend that is a serious travel hacker, but he spends so much time on it. To me the blog, working out, and other hobbies are more important to me.
Hey FF – I am with you. I am really only taking advantage of the low hanging fruit.
With this card, if you think I spent maybe 5 minutes signing up for the card in return for $450 in Free Cash.
Can’t argue with an effective rate of $5,400/hour
Thanks for posting about this, it looks like you can make some money with relatively little effort. This is a nice optimization, especially if you already spend that money anyway. I can see how maintaining an Excel spreadsheet with all the relevant dates would be important as well.
I’d curious to know how the activity affects (if it does?) the credit score.
Hey Money Mine – A spreadsheet would be great to maintain open dates and when to cancel to avoid the annual fee. However, I have also forgot to cancel a card and did so within a few days of the charge showing up and they reversed the fee when the canceled the card.
The hit to the credit score is minor. The important thing is to continue using credit wisely.
I have the Sapphire Preferred as well. It’s a great card even with the annual fee. With the Sapphire Preferred, you get 1:1 transfers of the points to hotels, airlines, and just about every other type of rewards system under the sun. Now, Chase gives you a value of 1.25 when you book the travel through them. HOWEVER, check the price of that same place by paying with points. I’ve found in some cases, it’s a better value to transfer the points to whatever place you’re looking at and book through them. Southwest Airlines Wanna-Get-Away fares are worth approximately 1.66 if transfer the points to Southwest and book through them using the “Book with Points” link on their site. I haven’t checked out Marriott or anything else, but I know sometimes different places run specials if you book direct rather than through Chase. Just something to keep in mind.
Thanks for the info Kevin. I will keep that in mind when looking to exchange the points for travel. Right now I am just going to take the cash from this card.
Thanks for linking to me as one of the “pros” in the article, I really appreciate it. I’m just a regular guy who figured out how to make this work for my family and I love helping other people get into it. I teamed up with my friend Alexi to start a completely free course to get people up to speed on travel hacking. There’s no time commitment, so no reason not to sign up if you’re interested:
This is a fun and lucrative game to get into — I think you’ll absolutely love it when you do it in a more systematic way. It gets addictive, believe me!
Thanks for the resource Brad.
I will check it out.
Hi Gen, Credit Card hacking seems to be an incredible side hustle. I like the fact that two people could even combine the points and use them in one card(What you did with your wife in the 4th Credit Card Hack).It seems i may have to get more readings from those sites you recommended.
Hi Chella – I know it’s crazy that they are just giving away so much money. But it just goes to show you how profitable most credit card holders are to them. The ones that don’t use credit responsibly.
Man this is brilliant Dom! Shame you aren’t an Aussie as I’m sure we have programs like this out here however I’d much rather focus on the investing & income side of the equation..
Thanks for sharing & hope all is well :)!
Jed – it takes very little of my bandwidth.
I need some money for my kids