Evidence on the Profitability of Credit Card Arbitrage
Financial Services Review, Vol. 17, No, 1, pp. 31-48, 2008
Posted: 30 Aug 2009 Last revised: 4 Mar 2010
Date Written: 2008
Financial institutions frequently offer low introductory interest rates to entice individuals to open and use credit accounts with their firm. This paper examines the possibility of earning arbitrage profits by taking advantage of these special offers. We develop a formula to measure the profit potential from undertaking credit card arbitrage and identify conditions conducive to profitable and unprofitable arbitrage. In addition, we examine the sensitivity of the arbitrage transaction to changes in interest rates, interest rate levels, and fees. Finally, we examine the impact of credit card arbitrage on the credit rating of the arbitrageur.
Keywords: credit cards, arbitrage
JEL Classification: G1, G2
Suggested Citation: Suggested Citation