Don't try this at home. How credit card arbitrage funded my first company.

> 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.

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...

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.

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.

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).

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.

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.... :)

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.

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.

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

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.

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

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

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.

> 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.

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.

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?

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...

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.

"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.

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.

"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.

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.

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.

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?

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.

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.

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.

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.

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.

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.

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

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

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.

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.

Arbitrage is not the same as borrowing money.

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

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.