How Do Minimum Payment Changes Affect Credit Card Arbitrage?

Abstract

This paper examines how changes in the minimum payment percentage and effective maturity of introductory offers affect credit card arbitrage.  Credit Card arbitrage involves taking a cash advance on, or making purchases against, a credit card that offers a low or zero percent introductory interest rate.  The proceeds are deposited into a Federal Deposit Insurance Corporation (FDIC) insured money market account.  Profits from this strategy are dependent on factors including the minimum payment due on the credit card each month.  Recently, under pressure from the U.S. Office of the Comptroller of the Currency, some banks have increased the minimum monthly payment percentage on their cards.  We measure the sensitivity of Credit Card arbitrage profits to changes in the offer maturity and the required minimum monthly credit card payment.  We also analyze how offer duration changes with changes in the minimum monthly payment.  These calculations represent an important contribution to the literature because of the unique pattern of credit card loan payments.