Credit cards are normally thought of as emergency funds. However, did you know that you can use credit cards to earn money? This is done by borrowing from your credit cards at little to no interest rates and then putting that borrowed money somewhere safe to earn interest. This is also known as credit card arbitrage.

All You Need

There are some credit card companies that offer promotions, where you are able to borrow money from them for nothing for a set period. Here is one promotion currently running:

• Citi Mastercard - 0% for 12 months (no annual fee, 1% transaction fee)
• MBNA Mastercard - 0% for 15 months (1% negotiable transaction fee, mail in only)

Here are two other promotions; however, you will need to find a savings account that offers a higher interest rate to beat this interest rate. These credit cards are ideally suited to pay off other lines of credit with higher interest rates:

• PC Financial Mastercard - 1.97% on balance transfers for 6 months
• RBC Visa Platinum Card - 1.97% for 9 months (no annual fee)

How It’s Done

Once you are approved, it’s usually very easy to get access to that credit. You can either call and have your full credit limit transferred into your bank account or you may receive balance transfer cheques that you can do the same thing with. In some cases (rare), you aren’t allowed to write a cheque to yourself, so you then have to overpay another credit card you hold and do a cash advance on that one to get access to the funds. The last one is a bit of a hassle, but still fairly easy.

Once you have the funds, you can then find the highest paying interest savings account available and deposit it all there. Bingo, there’s your money for nothing!

Here’s a couple recommended high interest savings accounts:

• ICICI HiSAVE Savings Account
• RBC’s High Interest eSavings Account
• PC Financial Interest Plus Savings Account

Some Key Points to Watch for

• The interest earned is taxable – you will get a T5 tax slip at year end for the interest, and you must pay tax on it. The good news is that a tax free savings account is being offered at most banks early 2009 so be on the lookout for that!

• Don’t use the card – once you do a balance transfer, you must not use the card for anything else until the promotion is over! This is very important, as credit card companies will apply any payments against your low/no interest balance first and any purchases second. Using the card during the promo would wreck your “money for nothing” advantage.

• Pay it off in time – be sure to monitor the promo timelines (I use Excel), and pay off the balance with your savings account before it expires. You don’t want to end up paying normal credit card interest on your balance.

• Use your savings account for payments - take money out of your savings account every month to cover your minimum payment on the credit card.

A Thought Provoking Example

Say you qualify for a $20,000 limit at 0% for 15 months. You transfer that $20k to your account, then to your high interest savings account, which pays you 4%. Over 15 months, you’d earn just under $1,000 in interest on that. You’d pay the 1% transfer fee of $200. If you were in the 31% tax bracket (middle income), that means you would have a net benefit of $490 for your troubles. Not too shabby!