0% vs Cashback Credit Cards!

Which credit card can make you the most cash over a year - a 0% for new purchases deal or a cashback card?

Regular readers will know how fond I am of being able to save money - and one of the best ways to do this is to be canny with how you spend it! I don't just mean comparing prices and making sure you get the best deals, I also mean the form of money you use. For example should you use debit cards, credit cards or good old fashioned cash?

The most obvious method is to simply withdraw money and spend it. But although you can often barter a cracking bargain with cash, this is rarely the case when it comes to day to day expenses (for example, that weekly shop at the supermarket). What's more, once cash is spent, that's it.

Cashback Cards

Now, the financially disciplined can throw cashback credit cards into the pot. These little beauties actually give you a percentage of your spend back as cash. Put all of your regular spending on the card and you could be looking forward to a healthy cheque after a year. Cool!

0% Cards for New Purchases

But what about 0% cards for new purchases? These let you spend on the card during the 0% period, and as long as you've made your minimum payment religiously each month will charge you no interest. Stash the money you've spent into a high interest savings account, pay off the balance in full once the 0% period is up and the lovely interest made is all yours.

Clearly both types of card have their benefits - but which is more lucrative? With savings rates higher than they've been in a long time is there more to be made from a 0% card? Or are cashback cards simply better? I decided to compare and assumed that I would spend £500 per month (with an extra £200 in November to cover Christmas expenses). Which method of spending will make me the most cash?

Now let me quickly stress that only people with a proven record of always paying off their full credit card balance on time should even consider using one of the above cards - to make any money you can't afford to be charged any interest at all. If you can't trust yourself, stick to a debit card!

First I need two cards.

Cashback card

After careful consideration I plumped for the Capital One Cashback World MasterCard for my cashback card. It pays a whopping 4% cashback for the first three months, and 1% thereafter, making it far more generous than others on the market.

0% Card for New Purchases

My card of choice here was the Halifax One MasterCard. It's got a 12 month 0% period on new purchases and transferred balances, which is the longest period available at the moment (and also a nice long 59 day interest free period).

How much could I earn after a year?

Cashback Card

Assuming £500 spend per month, beginning in November, and with an extra £200 being spent in the first month. Cashback awarded in the first three months = 4%, and the remaining nine months = 1%.

Total cashback for the year would be £113.

0% Card

Remembering that anything I spend on the 0% card would be stashed into a high interest savings account, I needed to pick the highest paying, instant access account that needed just £1 to open it that I could find.

Top of the current Moneyfacts savings table is the Birmingham Midshires Internet Saver, paying a whopping 6.4%AER (guaranteed to at least match base rate until 1 January 2009).

So assuming I would spend £500 per month, plus an extra £200 in the first month, the total gross interest I would accrue after a year would be nearly £219.

Tax

However, as most of us pay tax I need to take that into consideration.

A lower rate taxpayer would effectively be earning 5.12%AER after tax, which would equate to just over £175 in interest over the year. And a higher rate taxpayer would earn nearly £132.

So there you have it, the 0% card is the clear winner here, as non-tax payers would be over £100 better off after a year, and even higher rate taxpayers would be £19 wealthier.

But what about bigger spenders? If we were to look at the amount of cashback/interest earned after a year on a £1,000 monthly spend (still assuming an extra £200 is spent in November):

Cashback card: £218

0% card (non-taxpayer): £425

Lower rate taxpayer: £340

Higher rate taxpayer: £256

As you can see, yet again the 0% card triumphs, with non taxpayers £207 better off by choosing this card.

It's therefore official, the Halifax One 0% card has beaten the Capital One Cashback card!

And if you're thinking of taking out a 0% or cashback credit card, take note of the following tips:

1. Generally speaking, non-taxpayers can make bigger gains by using a 0% card for new purchases and saving the money spent, as opposed to using a cashback card.
2. Boost your spending total by applying for an additional card for your partner (as long as you trust each other) and putting all regular spending onto the cards.
3. If you travel frequently with work, try and pay for expenses with your card and stash the cash received in a high interest account until the balance needs to be paid off.
4. You will generally need a pretty good credit rating to be considered for either card.
5. There are other advantages to using a credit card, such as the protection offered by Section 75. Additionally, the Capital One card is currently offering free travel insurance, if you purchase your trip with the card.

Clearly the only way to be a winner is to ensure you either pay off your balance in full each month (in the case of the cashback card) or that you always make the minimimum payment on time, and ensure you stash the cash you spend (for the 0% card). But as you can see, it is possible to make money by spending money if you're canny!

More: Get Rewarded For Your Loyalty |Credit Card Centre.