plonkee money an english-er's thoughts on personal finance

August 29, 2007

additional income: stoozing, or credit card arbitrage

Filed under: credit and debt — plonkee @ 12:00 pm

what exactly is stoozing?

Its the practice of borrowing money for free from credit card companies, and then putting it into savings accounts in order to collect the interest. Its also known as credit card arbitrage, and there have been aficionados for some time. According to some the word ‘stoozing’ is derived from an early exponent of the technique whose username on the UK Motley Fool boards was Stooz.

aren’t credit cards evil?

No. Credit card companies are evil in the sense that all corporations are evil and want nothing but your money, but credit cards are a tool that it is possible to use to either lose a considerable amount of money, or through the technique of stoozing, gain you a considerable amount of money.

why will credit card companies lend me money for free?

Because they hope that you will get it wrong and end up paying them, rather than making money for yourself.

what is the best way of stoozing?

This depends entirely on how disciplined you can be.

the less risky and easier way

If you have saved up some money for say, a holiday or a new car, then you can use that to start your stoozing fun relatively risk free. Firstly, make sure that the savings are in a high interest account (tax-free if possible). Pay for the holiday / car / whatever on your existing credit card. You then apply for a 0% balance transfer card, transfer the entire balance of your existing credit card onto your 0% card, and then pay the minimum on this. Once the 0% balance transfer rate is about to end, apply for a new balance transfer card, rinse and repeat. The amount you make from this method depends on the size of your original savings.

the more convoluted way

This is outlined on money saving expert. It basically involves using a 0% balance transfer even though you don’t have a balance to transfer and putting the balance transfer amount directly into savings. Once you have the seed money, you can then keep transferring it between 0% cards, and you can (often) start the cycle again with a new balance transfer.

the 0% balance transfer offer has a fee

It can still be worthwhile using a 0% balance transfer offer with a fee. It depends on whether the fee is capped, and the underlying interest rate on the card. The fee will attract interest, and without paying off the whole balance (defeating the object) you cannot stop accumulating interest on the fee.

Suppose you have a �1000 balance transfer for a year with a 3% fee on a card with a 9.9% underlying interest rate payment, and you put the �1000 in a savings account that pays 6% tax-free. Ignoring the effect of the minimum payment, one year later you will have:

Savings account: �1000 + �60 interest = �1060
Credit card �1000 balance transfer + �30 fee + �2.97 interest = �1032.97

So you come out ahead.

If you include a 5% minimum payment at the end of the year you will end up with

Savings account: �444.90
Credit card: �432.97

So you still come out ahead. What you are looking for is the lowest possible fee (capped is better if you have a large amount to balance transfer), a low interest rate on the fee, and a low minimum payment.

isn’t it a lot of effort for little reward?

Yes and no. If you can get large balance transfers of around �10K, then you should make between �100 and �600 per year depending on the offers available. That’s up to �600 a year for free.

the key thing to remember

The easiest way to avoid messing this up is to never under any circumstances spend the original balance transfer amount plus fees and associated interest. If you want to spend in the interest, then fine, but at any point the balance transfer game could come to an end and you will need to pay back the money that you borrowed to the credit card company.

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