
Don't try this at home. How credit card arbitrage funded my first company.  - jaf12duke
http://www.humbledmba.com/dont-try-this-at-home-how-credit-card-arbitra
======
jessriedel
> For some personal background, I do come from a financially stable family. My
> parents could have covered the $16k to help me follow my dreams. But I
> didn't ask them (and neither did they offer). The financial pressure and
> responsibility of my startup was to be fully on my shoulders.

Even though he wasn't accepting money from his parents, he was implicitly
using their financial security to shoulder this risk. If everything had really
gone to hell, they would have helped him back on his feet. (Much like some
banks could take huge risks knowing the government would probably bail them
out, even if there wasn't an explicit agreement or exchange of money
beforehand.) Other people, like maybe his friend, don't have such a financial
safety net and so can't take on those kinds of risks.

~~~
bradleyland
Credit card debt is, in most states, entirely dischargable in bankruptcy. So
while it would be unethical to take on all this debt specifically with the
purposes of squandering it, the CC companies are extending you an unsecured
loan. It's really not all that bad of an idea, provided you can survive a
bankruptcy and a few years of exceptionally poor credit.

~~~
peteretep
> while it would be unethical to take on all this debt specifically with the
> purposes of squandering it

Actually, in the UK, if they can prove it, it's _illegal_. Be surprised if
that wasn't the same in the West.

~~~
bradleyland
I actually worked for a US Bankruptcy Trustee in Florida for about three
years. It is illegal here as well.

------
_delirium
Back in the mid-2000s, when money-market accounts were paying around 5%, and
there were a ton of promotional 0%-balance credit-card offers, people from
fatwallet used to use the term "app-o-rama" for this trick of applying for a
_ton_ of 0%-balance credit cards all on one day, so that they'd all be
approved before the credit score was updated. Then, there were ways to
essentially extract the balance as a cash advance w/o it being coded as a cash
advance. A few cards (like Citibank's) would let you do a "balance transfer"
via a check made out to you, and then you could transfer that balance to
others and repeat. The end result was that you could take out a quick $50k or
so in credit, put it in a 5% money-market account, and pay it all back 12
months later when the 0%-rate intro promotion would be expiring, netting $2500
interest.

You could also start a business with the cash, but that's a bit higher-risk...

------
scarmig
tl;dr: "And, so I raised my money through credit card arbitrage: $22k across
14 different cards. So, yeah. That's about it... For me, it worked out both
terribly and perfectly. The terribly part is that our startup failed, and I
never paid myself enough to pay the cards back. At the end of Openvote, I was
saddled with all this credit card debt, plus opportunity cost loss from no
salary, plus no job. It was a tough time."

It's a lesson in what not to do, as the author acknowledges. Though he seems
sanguine enough and has got back up on his feet.

Then again, I think there are easier ways to learn it's not a good idea to
rack up five figures of credit card debt on top of existing debt and no
savings... but whatevs.

------
decklin
Is this actually considered arbitrage?

<http://en.wikipedia.org/wiki/Arbitrage>

While the 4th credit card company he applies to has imperfect information
about what his credit is (at that point) actually worth, it seems like all the
deals are independent.

~~~
veyron
True credit card arbitrage, which is what helped me bootstrap, involves real
accretion of money

In my case, it was playing the us mint. They sell 250 $1 coins for 250 with
free shipping. Fidelity Amex card gives 2% cash back. So I would order tens of
thousands of coins and use the coins to pay the credit card build. 1K
roundtrip = $20, and it was pretty scalable. Nowadays there is a limit

~~~
2arrs2ells
Nowadays you can't buy $1 coins with credit cards at all. Those were the
days...

------
nostrademons
I went for the opposite tack when I founded my startup - live with my parents
and do all the coding myself - and I would highly, highly recommend that over
the credit card approach. My startup also failed. I also felt it was well-
worth it for the experience and skills gained. I also found I loved startups
and want to get back into them again.

The difference is that when my startup failed, I had money in the bank, no
debt, and no particular time limit for finding another source of income. And
that gave me options, and options gave me negotiating power. I was able to
turn down offers that I felt would be career dead-ends or wouldn't teach me
much, and would've even been able to found another startup immediately if the
right opportunity hadn't come up. Instead of working 6 months on boring
consulting jobs, I was able to spend that 6 months taking a job that taught me
things (which has turned into 2.5 years, because the job is _still_ teaching
me things).

------
waterside81
This is crazy - crazy interesting and crazy nuts. The idea of arbitraging has
always be fascinating to me. I've had an idea for currency arbitrage in the
travel industry, but never done anything other than back of the envelope
calculations. Feel free to take the idea:

Tour operators publish their prices for the upcoming year's trips. They
publish them usually in one currency, sometimes in two, rarely in three.
They're beholden to these prices because they publish brochures and distribute
them to places like Flight Centre.

So what you do is become a wholesaler of a bunch of tour operators' trips
(this is easy to aggregate, many have XML feeds that publish their inventory,
including pricing & availability). Then you use real-time exchange rates to
figure out which currency it's best to sell in to a customer and then buy the
product from the operator using another currency. For example, say the US &
CAD dollars are at par when prices are published. If the US drops a lot
compared to the CAD, you sell the trip to your customer in CAD but purchase
the trip from the operator in US.

The beauty is that operators will pay you a commission (usually 20-25%) on top
of whatever you gain from the currency arbitrage. There's some complexity in
becoming a legal wholesaler and being able to accept multiple currencies etc.

At the very least it makes for some interesting math.

~~~
JacobAldridge
And then you get a client like me, who points out that the price in Euros in
10% cheaper than the price in AUD because of currency fluctuations in that
period, and I would like to pay in Euros please.

The travel agency (in Australia) weren't able to do that for me, however - so
it seems their agreement was in a single currency as well. I'm not sure how
hard I could have pushed it, because the dates ended up not quite working
anyway.

~~~
waterside81
Ha, yes, but you'd be in the minority of travellers who think like that. But I
know of tour operators who refuse to allow this. If you're an Aussie resident,
you have to pay AUD. If you're in the EU, you have to pay in EUR etc.

------
benjohnson
Kudos for him _knowing_ that he was using his CC to fund his startup. I made
the mistake of not realizing that I was using my CC to fund my business - I
was using them for food, rent, and other things.

A lot of 'regular' businesses fall into the trap of building a lot of short-
term debt that isn't really obvious - owing their suppliers, owing their
employees, and owing the tax man. When a small hiccup hurts their cash flow,
the whole stack of cards comes crumbling down.

Or so I've been told.... :)

------
ryanmarsh
I tried this with my first startup. It worked, and my wife and I wound up with
a nice little online magazine that did pretty well. Then I got cocky, I tried
to do it again but wasn't as careful as the first time. Now I'm digging myself
out from under $60k in CC debt. Now I live by 3 before 1, make 3 before you
spend 1. We'll see how that works out.

~~~
pointyhat
I did exactly the same, except to get a contract outfit off the ground. I paid
off about $60k in total (in GBP) over 10 years. I worked out that in total I
made about 20% more than salaried people over the time. It definitely wasn't
worth it.

------
larrik
Kevin Smith used a similar technique to fund his first movie ( _Clerks_ ).
Personally, I think funding a movie with this technique is WAY crazier than a
startup.

------
nalidixic
Did you ever do a credit report with all those cards? It would be interesting
to see how having 14 cards with balances affected your score :P

------
nikcub
In most other countries and with some cards the introductory low or zero
interest rate is only on purchases and not on cash advances or withdrawls.

There are a few ways to get around that. You are probably breaking money
laundering laws if you do, though - so, disclaimer.

Find a friend or family member who has a small store and merchant account, or
setup your own merchant account in a company name, or put up an item on ebay
with a buy it now. Create one or a number of fake products with realistic
looking prices (some merchant terminals let you enter an arbitrary price).

Buy it with your new card and kick back the cash, minus the transaction fee.

You can then just keep bumping the balance to a new card when the introductory
period is up - just pay the minimum payments (which are usually very low).
Juggling to new cards with introductory rates is a lot better than applying
for many cards at once. It just looks like you got sick of your last bank for
poor service etc.

------
catshirt
i'm not really well versed in funding or business operations, but this just
sounds stupid.

~~~
tomjen3
Generally everybody says you shouldn't start a start up on credit cards.

What he went for is the advanced version where you can get free money if you
stack the cards correctly. It is difficult to do, but companies and financial
investors do it pretty often.

------
SurfScore
I feel like this is one of those "how to rob a bank" lessons that you find
sometimes from old-time thieves. It shows you how to do something to take
advantage of the system, definitely a hacker thing to do, but at the same time
its very dangerous and often unnecessary. More than one person is reading this
article and thinking "hmm..." I think this puts a lot of the "put the house on
the line" risk back into startups. Say what you will about the time and effort
starting a business takes, in this day and age of venture capital, it is
almost stupid to get into that situation. Nonetheless, people have done
crazier things, overextended themselves even thinner, and had no contingency
plan, and become billionaires. Its all part of the game

~~~
nirvana
Imagine he had $50k in the bank. So he didn't need to use the cards. He takes
the $20k out of the bank at the beginning of the year, puts it into the
startup, which fails within the year.

What's the difference between the two situations? In one, he spent however
amount of time earning the $20k before he put it into the startup, in the
other he spends however amount of time working off the credit card debt after
the startup fails.

The real difference between these two is the interest rate on the credit
cards, and that's about it. In both cases he has to work to earn the money he
put into his startup, though it might be more painful to do it after failure
than before.

[I think its amusing that this comment has been down voted. I wasn't
disagreeing with the person I'm responding to, didn't say anything offensive,
and offered a different way of looking at things that seemed to be missing.]

------
nhangen
I don't get why everyone is hating on the author for his usage of credit
cards. It's not the first time I've heard a story like this, and it's
certainly not going to be the last.

I did something similar with an Amex card, and used it to bootstrap the
development I couldn't perform myself. As long as you manage the risk and plan
accordingly, it's not as bad of a play as it's made out to be.

Also, the author never said anything about bankruptcy, and he seems a man of
his word. I didn't get the impression he was going to burn through the cash
and then file bankruptcy if it didn't work. In fact, he didn't, and it didn't.

When you have a dream, and you believe in it, you do everything you can to
make it work.

------
pavel_lishin
> Learn how to code so you don't need to hire programmers.

Yeah, you can just get one of those "Learn how to Program in 30 Days!" books,
and it's just as good as hiring someone who does it professionally.

This whole post reads like a big "Don't Do What Donny Don't Does" book.

------
0x12
For a software startup it is perfectly possible to get off the ground with an
outlay <$100 and some of your time. I really don't see the need for dramatic
and totally silly strategies like these.

Using one hole to plug another never was a really good idea.

~~~
atakan_gurkan
I think you missed the part where he says they had no coders as founders, and
also the part(s) where he says "don't do this".

------
eatm0rewaffles
Wow, a very pleasant read! For someone who was seriously considering doing
this I have to admit your perspective is quite admirable.

The only question I am left with is how much did you end up settling for or
how long did it take to eventually pay it all off?

------
aklein
Back when I graduated college in 2002 into the tech bust and kept getting
credit card offers to "transfer my balances at zero interest for six months",
I took a bunch of zero-interest cash advances and put them into the ING
savings account yielding 3-4% at the time. I did it for between 6 months and a
year and netted a few hundred bucks before closing them all out. I wouldn't
recommend it because a) it was more headache than it was worth to keep track
of payments, and b) who knows what it did to my credit score. It was
definitely an arb, but probably not operationally worth it...

------
gee_totes
I worked with someone who financed a feature film on 67 credit cards. He
didn't make his investment back at all, and had to disappear for awhile, as he
was saddled with about $300,000 in credit card debt. But when the credit card
companies did catch up with him, years later, he was able to settle his whole
debt for about 30k.

Running from the credit card companies ruined his credit, of course, but I
wonder if the author of the article would have gotten a better rate of return
if he had just hid from the credit card companies, waiting for them to get
desperate enough to settle.

~~~
wanorris
The opportunity cost involved in "hiding" might make this a bad deal though.
The author was involved in doing above-board consulting work and planning his
next startup.

I would expect that taking legal employment under your own name makes you
relatively findable. Worse, recruiting investors for a startup is likely to be
much more difficult if they perform due diligence on you and discover that you
have a history of running away from creditors.

Of course, even worse than that is that the author planned his moves carefully
in advance. While running off when you owe too much money isn't the best move,
_planning_ to run away from your debts might well be prosecuted as fraud.

------
astrofinch
"My friends that deferred their startup dreams for high-paying consulting jobs
got no closer to learning how to build a startup and, worse, became accustomed
to the life that a high salary affords."

It seems to me that the simplest way to solve this problem is to keep a very
close eye on your standard of living. Personally, I buy most of my food from
the dollar store and think of my summer internship savings as a "bankroll"
that I should gamble with carefully.

------
dolbz
Maybe I'm missing something but how is this even arbitrage? If you were just
putting the money into an interest bearing account and repaying before the
interest rate kicked in then yes it would be arbitrage (if you could even beat
the 3% fee) but that wasn't happening here.

The author was just taking the 0% rates and using them to fund his company
which didn't work out. There was never a guaranteed upside to this which is
what you would expect with arbitrage.

------
techiferous
"Learn how to code so you don't need to hire programmers."

That's the hidden gem. Only do this if you enjoy programming, though, because
it's hard work, _especially_ in the beginning. Expect a year or two to get
fluent, not a month or two.

But once you know how to program, you don't have to spend time finding scarce
developer talent, you don't have to spend time communicating requirements et
cetera, and most of all you don't have to pay them $X.

------
kevinpet
1\. This isn't arbitrage. Arbitrage has a specific meaning (profiting from
price disparities in the same item in different markets). This could be
described as a carry trade, but it's mostly just an inconvenient way to get a
business loan.

2\. This isn't even correct. It claims that you can get your credit score for
free, which is incorrect. When I notice one error, I suspect there are other
errors.

~~~
chris_gogreen
I get a free score from all 3 bureaus for free once a year.

~~~
foxit
No, you get a free credit _report_ from all 3 bureaus once a year. Getting
your score costs.

------
chris_gogreen
I think you are talking about moving balances between cards, sometimes called
floating. It might loosely be arbitrage if you use the cash back features to
think of the value of a dollar spent on one card being less than the other. If
3% cash back, spending one dollar on the card really only costs 97% of one
dollar, then pay it off with a normal 0% cash back card.

------
dholowiski
Wow... that takes balls. Getting 0% introductory rate credit cards, and taking
a cash advance... and then putting the cash in a bank account that pays
interest. Of course, if the business fails - as it did in the author's case -
then you're stuck with all of the debt and a broken credit record, but it's
all about taking risks right?

~~~
Duff
As long as you have the ability to start earning quickly and are smart about
it, you can get through that without breaking your credit record.

The key to dealing with credit cards is understanding the terms -- it's all
written down in a little document that nobody reads. In particular, you need
to understand precisely how each lender defines "default". "Default" == no
more 0%.

Also, this guy had the business networking chops required to jump into
consulting gigs immediately upon declaring failure. The exit strategy is
essential.

I did something similar to this with a house that I needed to get out of
quickly. I borrowed $52,000 over several cards and ended up using $40k. The
$12k was used as a pool to make the automatic payments from. End result? The
value of the home increased by $80k.

------
driverdan
This isn't arbitrage but it's a good article anyway.

I did something similar about 5 years ago but with "investing" the money in
HYIPs (high yield investment programs). I was woefully ignorant of how many of
these are scams (99.999%) but managed to make a decent return and not lose my
shirt.

I wouldn't recommend doing this to anyway. The risks are extremely high.

------
monochromatic
Arbitrage is not the same as borrowing money.

------
sneak
This is the second article I've read on HN in as many days from this blog that
ends every post with "my new company $x is going to change how the world does
$y"!

The title is also inaccurate linkbait.

I appreciate self-promotion as much as anyone, but I think this isn't the way
to go about doing it.

------
usaar333
Why did submitter take a cash advance? Typically, you can get 0% purchase APR.
The correct course of action is to cash advance the minimal amount you need
and pay for every purchase you make with your 0% cards. Would have saved this
guy a few hundred dollars.

------
unfed
Setup an Adwords campaign say $0.25 CPC. Funnel the traffic to a page where
you have Adsense ads paying $0.30 CPC. That's arbitrage for you. Not sure why
you guys using gold and CDS as examples on HN.

~~~
wesleyb
You're forgetting something: click through rate. Unless it's somewhere above
90% (in which case you're one hell of a marketer -- or you're paying for the
traffic), then you're essentially burning your money.

------
spokengent
For bonus points:

Find the credit cards affiliate program. Sign up to it, and use it. You might
get for example $50 commission, for signing up to a 0% credit card, if you use
your affiliate link.

~~~
cosgroveb
I don't think the fraud is really worth $50.

~~~
spokengent
Several affiliate networks explicitly allow you to use your own affiliate
links.

Also, if you're more concerned about it and want an easier way, use some
reward/cashback program website.

------
msutherl
One of my co-workers did this in the early 00's, but for the opposite reason:
to pay off $50k off capital gains task. Worked quite well for him.

~~~
usaar333
The IRS has pretty high convenience fees if you use a credit card (~2%). In
the higher interest early 00's, this might be worth it; today, not so much.

------
grayrest
I first heard of this in Bram Cohen's (bittorrent) PyCon keynote in 2004 (?).
He basically started bittorrent the company this way.

------
chris_gogreen
You forgot to talk about the part where you use arbitrage, you simply
described how to get lots of credit quickly...

------
nirvana
This isn't credit card arbitrage. Let me describe one idea for how Credit Card
Arbitrage could work.

You take out a bunch of credit cards, as he describes. Preferably ones with
zero interest for the first year, or 6 months. You extract as much cash from
them as you can. You put a chunk of that cash in the bank to make minimum
payments from, and then you put that cash into an asset that will return more
over the next year than the cards will charge.

[EDIT TO ADD: Want to clear up some confusion. In order to arbitrage interest
rates, you have to have whatever you buy return more than what you have to pay
for the money. There's one factor that people often forget when thinking about
interest rates, and that is inflation. Dollars spent to pay off a loan are
worth less than dollars you get at the beginning of the loan. This means, the
asset you put your money into, needs to return not only enough to cover the
interests & fees on the credit cards over the time period, but the monetary
inflation rate over the time period. Thus, something that is an inflation
hedge is beneficial. This is why I talk about gold below, and later I talk
about CDs and even stocks.]

I'd suggest buying gold, or gold miners, or if you're super sophisticated,
options on solid gold mining companies. (each of these has increasing leverage
to the price of gold.) But it doesn't have to be gold, it just has to be
something that is a "no brainer" way to earn a positive return above the rate
of the credit card interest.

This may be difficult, and in fact, it should be difficult, because if it were
easy the credit card companies would do it instead of loaning the money to
you.

Potentially, you could take the money from the credit card company and put it
into a CD at the very same bank. This works only if you really have "no
interest for one year". Buy a 9 month CD (or better yet a 10 month CD), and
then when it matures, pay off the credit card, and you get the interest from
the CD for free.

The thing that makes such arbitrage opportunities so valuable is that, because
the asset you're buying returns more than the cost of your money, you can
scale it up pretty much infinitely.

But this is where things get problematic if you don't cover your downside.
When the Bank of Japan was lending money at nearly zero interest, many banks
borrowed in japan, converted the money to other currencies, and then bought
treasuries of other countries. This is called the carry trade.

In fact, I wish I could start up a bank right now. I'd love to borrow money
from the Federal Reserve, which is loaning it out at almost nothing, and buy
the best bonds (along with some protective put options) I could find on the
market.

A company wants to borrow for capital expansion, it will pay a reasonable
interest rate-- say %6. The Federal Reserve is loaning at something like %1.
%5 profit, at the only risk of the bond (so protect it with a CDO.) It must be
great to be a bank.

If you have a startup you need to fund, and you can get a CD the interest
rates right now are about 1.15%. So, I think this doesn't work for arbitrage,
because while you may have "zero percent interest" there are going to be some
fees that will overwhelm that meager interest rate.

But, if you could get a CD that paid out %6, and could borrow at %1 (on the
"zero interest" plans) then you'd only need $400,000 in credit card debt in
order to raise $20,000 for your startup!

Realistically, credit card arbitrage doesn't really work too well. If you get
something with a higher rate of return, and you use borrowed money to buy it,
then that's really investing on margin and not really something you could call
"arbitrage". I'm sure it works for some people doing startups.... but isn't
really reproducible on a wide scale.

BY the way, if you want access to some of that federal reserve money at cheap
rates, at least some brokers are passing it along to their margin customers.
Then you can start looking for a solid high yielding company, borrow %50,
effectively doubling your yield... don't forget to buy some put options to
cover your long position in case it crashes.

~~~
feral
I don't think what you are talking about is arbitrage, either.

You are talking about using interest free loans from credit cards in order to
make a leveraged bet on the price of gold; that is not arbitrage.

If gold decreases in price - and its close to record highs, however you want
to intrepret that - you are taking a huge risk.

~~~
nirvana
Maybe I should have been more clear. What you're arbitraging is two rates of
return-- the interest rate of the loan, and the return of the investment. In
more conventional arbitrage, you're buying a commodity at one price in one
market and selling it at another price in another market at exactly the same
time. Here you're doing that, only the commodity is money. (Gold is money.)
You could substitute a foreign currency, or foreign bonds for gold in my
example, just as easily.

In that case, you'd be borrowing US dollars and buying, say, Greek Bonds. I
picked that example because greek bonds have a high rate of return. They're
also debt... you're getting debt in one market and selling it in another.

Greek Bonds obviously have risk. All arbitrage has risks, and those risks can
be huge. That the risk is huge doesn't make it any less arbitrage.

FWIW, I don't think gold is at a particularly high price. I think the dollar
and other currencies, which have been long over valued, are a little less
overvalued than they were. I don't price gold in dollars, I price dollars in
gold.

~~~
derobert
You're missing the key point of arbitrage: its risk-free.

Say you borrow $100k at 0% for 1 year. You then buy (at $1734/oz) ~57oz of
gold. Next year, you plan to sell it and pay off your $100k.

But you've taken a risk. If gold is only $1500/oz next year, you're going to
lose ~$13k. Of course, if its $2000/oz, you're going to make a nice profit.
You're speculating on the gold market. You could build a similar position with
gold futures, for example.

Arbitrage would be if you could take that $100k, and immediate buy gold in
USD, sell it in EUR, and then buy USD with those EUR and wind up with >$100k.
Then you're not taking any risk, because you can set up all those transactions
practically at the same time (and the markets are liquid enough you know the
prices you'll be able to buy/sell at).

~~~
2arrs2ells
While the academic definition of arbitrage requires it to be risk-free, in
practice there is always risk of some form.

If you're buying gold in SF for $100 and selling it in NYC for $101, you carry
the risk that the price will move while you're executing the trade.

If you're doing the yen carry trade (borrowing yen, and lending dollars), you
carry the currency risk.

If you're taking 0% credit card loans and buying CDs, you carry the default
risk on the CDs (mitigated, of course, by the FDIC).

That said, I agree with your general point - buying gold with a 0% loan
carries so much risk that it's really just a leveraged investment, not an arb
opp.

------
vicparekh
I did this once when interest rates were above 1%. Currently risk-free
interest rates are too low for this action to be worth it.

------
rkon
Completely deceptive linkbait title and a worthless blog post about racking up
credit card debt. THIS is what gets upvoted on HN now? Pathetic...

------
reidbradford
This is the dumbest thing I've ever heard of. I definitely would not want to
be blogging about this.

What happened to good old fashioned shame and just getting on with your own
business? Everyone wants to be a fucking celebrity.

~~~
muhfuhkuh
Wow, you must really hate pg and patio11. They spill about everything openly.
What attention whores, amirite?

These types of blog posts are merely confessionals with learning points
attached that the confessor hopes the reader would find salient. You
apparently didn't. And...?

