Part Four: How I Achieved Personal Financial Self Mastery

Credit Card Arbitrage

I first learned about credit when I was 12, on a carefree summer day at our country club swimming pool.  My mom grew tired of walking me to the snack bar every time I needed something to eat or drink.  So – she gave me permission to charge on our tab. 

Most country clubs don’t accept cash or credit cards.  For reasons beyond me, even in our digital age, they prefer to methodically track member purchases, mail detailed printed invoices, then wait another 30 days to get paid.  The only method of securing food or beverage at our club was a signature from a member. 

The club staff didn’t seem to mind that a 12-year-old boy was signing tabs, because I was backed by the full faith and credit of Mom and Dad.  And I knew the food wasn’t free – kind of – but I was enchanted by the ease of getting whatever I wanted through the brush of a pen stroke. 

And I couldn’t stop.  I bought suicide colas for my boys, candy for the girls, and gorged myself on French fries.  For about two weeks, I was the most popular 7th grader at the pool.  My parents were unaware of my spending spree – until our bill arrived – setting a club record for most snacks ever purchased at a window by a 12 year old kid.  

I was a junior in college when I got my first credit card.  I remember pulling that distinctive unmarked envelope out of the mailbox, and finding a shiny card amidst a sea of paperwork, with my name emblazoned on the front.

My new card was issued by a local bank and they wouldn’t approve me until my friend Geoff, who worked there as an investment advisor, vouched for me.  These were the days before easy money, before banks stalked kids on campus, and sent millions of credit card solicitations in the mail. 

They gave me a $500 credit limit, I activated the card on a Thursday, and by that Sunday I was over my limit by $37.  

That weekend was a blur of beer, burritos, pizza and booze – whatever I wanted with scant attention paid to the consequences, kind of like when I was 12.

That $537 would snowball into thousands more in debt and cling to me for another 13 years.  

I would eventually pay it all off, and in the process learn a lot about credit cards, and how to begin using them to my advantage – just like successful businesses do.

How to Get 2 Months of Free Credit

Did you know you can use a credit card for almost two months and not have to pay the bill – or a single dime in interest?  I call it Credit Card Arbitrage

By definition, arbitrage is taking advantage of a price difference between two or more markets.  For example, if you buy a shipment of oranges for $100 and know you can immediately sell them somewhere else for $150, that’s arbitrage.  Or in simpler terms – it’s the possibility for a risk-free profit.  What I’m about to describe here doesn’t involve profiting from the buying and selling of goods, rather it’s how to benefit from a short-term free line of credit.   

Here’s how it works.  When you receive a monthly billing statement from your credit card provider, there will be three options for payment:

  1. Minimum due
  2. Statement balance
  3. Current balance

Below is a snapshot from one of my credit card statements.  My current balance is $696.94, my statement balance is $691.60, and the minimum payment is $25.

Paying just the $25 minimum is obviously a bad idea, because it won’t pay off my debt, and I’ll be charged interest on the remaining balance.  This is how credit card companies in part make their money. 

People who only pay the minimum will be charged DOUBLE DIGIT interest on their remaining balance.  It goes without saying that if you are using credit cards and only paying the minimum, you shouldn’t be using credit cards.  And your focus should be on reducing overhead, maximizing positive cashflow, and climbing out of debt.  

The current balance of $696.94 is what I owe, but not necessarily what I have to pay.  The statement balance of $691.60 is what I need to pay if I want to avoid interest charges. 

The statement balance reflects what I spent during the prior month’s billing period.  And it can be different from what I actually owe (the current balance), in fact it can be vastly different, but in our example here it only varies by about $5.

How can the statement balance be different from my current balance?  Because once my billing period closes (in our example it closes on the 20th of each month) the statement balance becomes fixed. 

When the new billing period starts on 12/21,  whatever I charge through the 20th of the following month won’t impact my established statement balance of $691.60.  Confused? 

Stay with me here, because I can exploit a fixed statement balance to improve my cashflow.  How?  By using multiple credit cards and then shifting my spending to cards with zero (or low) statement balances, creating a two-month period where I don’t have to pay the bill – without penalty. 

In the example below I’ve created an optimal situation by not using this card during the previous billing cycle. My current balance is $36.54, my statement balance is zero, my minimum payment is also zero, and my billing period closed on 11/21.  Even though I owe $36.54, I don’t have to pay it on 12/18.  Nope, I don’t have to pay the $36.54 until 1/18.

Why?  Because my statement balance is at zero.  Meaning I can charge anything I want on this card from 11/21 through 12/20 and still owe NOTHING on 12/18.  What I charge from 11/21 through 12/20 – plus the current balance of $36.54 – won’t be due until 1/18.  This means I control that credit (at no cost) for about two months – or about 58 days.

Here is another example. I received this statement on 6/21 and owe $135.76, my statement balance is also $135.76, and the minimum due is $25.  So, whatever I charge from 6/21 to 7/21, won’t be due until 8/17.  And If I just pay the statement balance on 7/17 – I won’t be charged any interest during this two-month window. 

Again, once a billing cycle closes, the statement balance is the only thing needed to avoid interest and fees, and if I rotate in different cards with a low (or zero) statement balance, I can create a perpetual two-month float of credit to optimize my personal cashflow.        

Why Would Anybody Go to This Trouble?

Working on 100% commission is an unpredictable existence, and I often had months where I couldn’t pay all the bills with my latest paycheck.

Using Credit Card Arbitrage I am able to collect four paychecks over two credit card billing cycles, essentially smoothing out the peaks and valleys of my sporadic earnings. 

It’s no different than a business utilizing a line of credit to shore up periods when their receivables are slow – allowing for more time to collect or sell product or services.      

To me this is the essence of operating like a successful business.  Why tap into my precious cash reserves unless it’s absolutely necessary?  You might be thinking, well, isn’t that exactly why you have a savings account?  Absolutely, but why disturb money earning interest when I have free money – in the form of credit at my disposal?          

There are a few other ways I can take advantage of these two-month loans.  First, it gives me more time to pay off unexpected expenses or handle emergencies.  Like when I’m facing a large car repair; new tires, new brakes, or engine problems. 

My car is older, so I’ve had repairs costing over $2,000 when I didn’t have that kind of cash on hand.  So, I’d find a credit card with a zero (or low) balance, one with a billing cycle that just closed, and now I’ve bought myself two months to pay off that unexpected expense.  Let’s look at what happens when I used the credit card from our last example to pay for a $2,000 car repair. 

If I pay for the $2,000 repair on 6/22, then on 7/17, assuming I don’t charge anything else on this card, my account balance will be $2,135.76.  My minimum payment will be something like $25, and my statement balance will still be $135.76.  And as long as I pay that statement balance, I won’t owe interest on the remaining $2,000.  In fact, I won’t have to pay that $2,000 until 8/18 — a full 30 days later – for a total of 58 days since I made the purchase.        

Second, using this flotilla of credit helps me take advantage of lump sum or cash discounts. 

Cash Discounts

Savvy business owners never turn down an opportunity to reduce costs (or reap rewards) by paying bills early, or, by paying up-front or via lump sum.  Why?  Because it’s free money. 

It’s known as a cash discount, or sales discount.       

Credit cards combined with quarterly cashflow management empower me to maximize cash discounts for my personal benefit. 

For example, auto insurance. Geico and most other insurers incentivize customers to pay their policies up-front (or biannually) by offering discounts on their rates.  

In the example below I was given 5 options to pay my car insurance.  If I pay up-front it costs me $517.  If paid over two installments the total rises to $527, if paid in five installments it rises to $542.  Not a huge difference, but it’s still free money in the bank just for being able to optimize my cashflow.

Why does Geico charge less if I pay up-front?  Because the earlier they get my money, the earlier they can invest and earn interest and pay their own bills. It’s a win-win. 

I used to work for an advertising agency who managed large volumes of circular printing for grocery chains.  Our print vendors were saddled with fixed expenses like paper, ink, labor, and maintenance on their gigantic presses. 

The printers offered discounts of 3-5% if we paid our bill in full within a few days of being invoiced.  A few percent may not seem like a lot, but it adds up, especially when the invoices were for hundreds of thousands of dollars.  

My agency didn’t always have the cash on hand to pay these bills in full, but by using credit cards and juggling their cash, they were able to collect discounts and earn significant rewards.

Cash discounts can take on many forms in personal finance:

  1. The annual savings from never paying ATM or bank fees.
  2. Earning interest on your checking and savings accounts.
  3. The annual savings from not paying any interest on debt.
  4. Earnings and rewards from credit cards.
  5. Discounts earned by paying expenses up-front, like the insurance example I shared earlier. 

Thirdly, I’m also earning rewards from my credit card spending, which means not only am I utilizing free credit, I’m getting paid to do it.

It Actually Pays to Use Credit Cards

Every successful business from a donut shop to a Fortune 500 multinational corporation has access to credit and uses it to their advantage. I have 12 credit cards, some from the major banks, and others from local banks and credit unions.  In total, I have about $165,000 in accessible credit. 

And by having multiple credit cards, I’m able to keep several with low or zero balances at any given moment. I use this simple spreadsheet to help me track my credit cards so I can exploit zero statement balances when needed. 

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Notice how most of my due dates are just after the middle of the month.

Since I’m paid bi-weekly, I’ve aligned 8 of my 12 due dates toward the paycheck I receive in the middle of the month, which is also my commission check.  And since rent is my largest expense, and it’s always due on the 1st, I steer as much of my other spending towards the middle of the month. 

Having a large pool of credit also increases my credit score.  One of the six factors determining a credit score is total usage of available credit.  So, the more credit I have, the lower my percentage will be. 

And most important, all of my credit cards earn rewards. In 2019 I estimate to have earned a total of $5,000 in combined cash discounts and rewards. 

My rewards are mostly travel related for flights or hotels, or cash back and statement credits.  The website Nerd Wallet is an excellent resource to finding the right rewards card for you. 

This link will take you to the Nerd Wallet home page: http://bit.ly/2VlxxJh

You might be asking, or wondering, do banks mind me taking advantage of their rewards while also exploiting these short-term lines of credit? 

No, because there are plenty of other people without the discipline and knowledge to maximize the benefits of credit cards while avoiding the pitfalls of paying fees and interest.   

Banks also make a TON of money on interchange fees; the fees merchants (like a grocery store) pay for the convenience to use their payment networks. 

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As I close this series of posts, I want to point out that everything I do may not be the right thing for you. After reading most of the books written about personal finance, I took what worked for me and adapted it to my lifestyle.

You may not be comfortable using credit like I do, that’s OK. You may not want to run your finances using spreadsheets and websites, that’s OK. You may like writing checks and enjoy visiting your bank branch, also OK.

The point is, if you want to become a elite seller, a rainmaker, someone who is magnetic to prospective clients, then you must recognize the importance of having your personal finances in order. Nothing is more magnetic than someone with real choices about who they do business with.

Take the ideas you like and have the courage to adapt them to your life, and instead of acting like you’re financially independent, become financially independent and truly not need the money.