Credit Card Arbitrage – Why the game is far from over

I hear in the babbling internet that the The Game, as we know it is changing.  For those of you who have been playing for a long time you have already experienced many changes for the worse, and perhaps each change is a little harder to swallow, to the newer players they are less upset because they haven’t been playing long enough to become dependent on its benefits.

For those of you not playing the game, it is not too late to join, the game is called Credit Card Arbitrage. The purpose of the game is to profit by playing by the rules the card issuers create.  In their desperation to convert more customers they offer ever enticing lures in the forms of rewards and bonuses, they are intended to gloss over the darkness that is their fee structure, and divert attention away from the penalties that they have built into repayment plans in order to exploit the naïve.

This site promotes certain cards, which does appear dichotomous with my sentiment that credit cards can do considerable harm to people and families, however I do so from the perspective that if we play the game correctly we can tap into the good and avoid the bad.  I completely believe that cards were never designed to offer us value, as much as they attempt to convince us otherwise.

One of the most popular forms of arbitrage can be used in conjunction with the travel business.  Travel Hacking is a term that people bandy around when it comes to using points and miles to travel rather than pay with income. For some the term hacking sounds negative, and to others it is too fancy for their liking, personally I am ambivalent to it, but having a name for this does help serve a purpose, in defining a concept.  For me Travel Hacking is distinct from Credit Card Arbitrage in that it does not depend solely on cards.  Rather, it is focused upon finding value opportunities within travel.

The reason that Travel Hacking and Credit Card Arbitrage should be treated as distinct items comes down to this basic Principal:

• Travel Hacking, or finding value within a travel program, is an Outflow, in that you are required to spend money, points or miles in order to receive the travel in exchange.
• Credit Card Arbitrage is an Inflow, in that you are seeking ways to obtain money, points or miles in a manner that creates profit.

In other words one is spending, the other is earning.  This distinction is important to note because it allows us to find new opportunities, when people think that the value is vanishing, it allows us to innovate. Even when we go through a period of mass devaluation we can still beat the system, all we need to do is remain on a quest for profit.

Credit Card arbitrage this year has allowed me to not only travel extensively for free, but also build up a Brokerage Account using cash back.  Next year the travel will be less accessible as the frequent flyer programs that I have leaned upon from United, Hyatt and others are becoming less of a bargain, but other things will become more possible.

People might say that the best days are gone, but I disagree.  I think that we are currently going through a transition phase where great opportunities arise.  The transition is that the financial world is desperately seeking to shift away from physical transactions and move to electronic ones, a world where you don’t need to carry your card and can instead have payment options linked to your accounts for automatic, thoughtless payments.  Chase for one is trialing a program currently that is costing them massive amounts of money to see how people react to booking restaurants through an app, that has your Chase Sapphire Preferred card attached to and where you just leave at the end of a meal without asking for a check.

These companies are battling for supremacy, some like Chase are developing in house, whereas others are partnering with technology firms, or may even acquire transactional firms in order to have the technology they desire, look no further than eBay and Paypal for an example of that.

The battle now is for the pipelines, the payment systems, as they run Beta tests and attempt to gain loyalty opportunities arise, and in a marketplace where there is massive amounts of money to be made and no real leader, you will see increasing competition as time progresses.  As such, the game is far from over as new earning opportunities will arise constantly.

It’s not just about free travel folks, it’s about finding value, and this can come in many forms.

There are ways, that I will not list here because I don’t want to encourage this, for the Airlines and Hotels to instantly devalue to zero all miles in circulation, should this ever happen the game will not be over, because we must remember that travel is just one way to spend our money, points and miles. Should such a thing happen it would hurt most those that are over exposed to an individual product, as such it is recommended that you keep your balances as much as possible within the transferable programs offered by Amex Membership Rewards, Starwood SPG and Chase Ultimate rewards.

I wanted to run through an example of how valuable arbitrage remains, let’s not lose sight of this as our First Class seating flies out of our grasp:

• Bluebird and Vanilla Reload combinations would earn $1,452 per year
• Amazon Payments Accounts would earn $480
• My $75 for $100 deal would earn $2252.20

From just those 3 simple things a couple would be able to generate an annual profit of $4198.20

That number is pretty amazing.  What is special about it is that it is close to the limit for IRA contributions, and also close to what you need for college education.  In fact, using a conservative 6% annual gain from the stock market the value over 18 years is a staggering $129,748!

Ironically, $129,748 is the number that the College Education Board give as the average cost of 4 years of Private College in 2013, however Education Inflation is rising rapidly, way beyond regular inflation and even further ahead of savings options, and as such the average cost of Private college in 2031 is estimated to be at least $320,000 per student, not a pleasant thought, but still putting away $129K of that without pulling a single dollar bill from your pocket is pretty amazing, and shows the real value of the game we play.

Incidentally, the amount you would need to save per year should you wish to put the full $320,000 away would be $10,325 assuming a 6% stock market return.

The good news is that if you do have a kid, you do get a new SSN in their name, and you could put them to work earning their own college fund – if you were to add on a third person to the 2% Arbitrage Program above you would increase earnings by 50%, making an annual income of $6297.30; that, a little haggling on price with Admissions and a bright enough young person could well see junior getting into Harvard.

The example I picked here is for what most people would say is hardly worth the effort, if that is the case just think of the value that can be drawn when the cards become 5x and the opportunities are more plentiful… The game is afoot!