Interest bearing debt seems like a contradiction in terms---and often it is. Millions of American consumers are swimming in non-interest-bearing debt. However, there are a small percentage of market-savvy consumers taking advantage of interest-bearing debt. The process of earning while in debt is called arbitrage, or, for the average citizen, credit card arbitrage.
Before Arbitrage
Credit card arbitrage is not for the faint of heart. The process involves taking on huge sums of credit card debt and investing it. Before engaging in this process, make sure you are well capitalized---so that you'll be able to cover your debts in the event of a loss---and well versed in market trends.
How It Works
Practitioners of arbitrage follow this process: first, acquire several high-limit, low-interest credit cards; second, take massive cash advances off each account; third, invest the capital into interest-bearing accounts---often money-market accounts; fourth, cash out the investments; fifth, repay the debts and collect what profit remains.
Benefits
For those who are market savvy, arbitrage is an easy way to make profit from interest. For example, if you were to place $40,000 in credit card funds into a standard money market account---most have interest rates of between 1 percent and 3 percent---and then withdraw the funds one year later, you would have made between $600 and $1,200. If you seek a higher return, you can invest in the stock market.
Understanding Interest
It's important for those interested in arbitrage to know how interest is compounded. Many money market accounts work differently, but the most common compound their interest on a monthly basis---which means if you add more to the account before the compounding takes place, you'll maximize your earnings.
Risks
In true arbitrage, there is zero risk if you use only money market accounts---which will never reduce your initial contribution---and use long-term strategies to earn profit. However, the longer you keep debt in an account, the longer you need to make minimum payments on your credit cards.
However, profit-hungry investors sometimes choose risky stocks---which can fluctuate wildly---and lose part of the money that was invested. If you are playing with borrowed money in the stock market, you MUST be a seasoned investor with a track record for solid returns.
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