They say there's no such thing as a free lunch, but this Fool has conjured up £350 out of thin air. Here's how.
Although I've had an absolute nightmare with credit cards in the past, I've learnt my lesson. Indeed, I spend a fortune on them nowadays.
However, there's a big difference between how I use my plastic cards today and how I used to handle them in my bad old days. Back in the Nineties, my reckless spending left me nursing a debt of close to £50,000. In the words of Errol Flynn, my problem was "reconciling my gross habits with my net income". Thus, I built up debts across thirteen credit cards and three personal loans. Ouch!
Nevertheless, I now pay for all of my purchases using my credit card. Just about everything goes on plastic, from a £3 bill for bread and milk, to my children's nursery fees, and everything in-between. There are three key benefits to using my credit card in this way:
- 1. I get a monthly statement showing all of my expenses (apart from those I pay via my current account by direct debit or standing order).
- 2. By paying off my monthly bill by direct debit, I can enjoy an interest-free period which lasts for between 45 and 59 days.
- 3. By spending on a cashback credit card, I earn `free' money as I spend.
For almost two years, I've been using a former Best Buy cashback credit card, the Morgan Stanley Platinum card. This card pays 1% cashback on the first £2,000 of yearly spending and 0.5% thereafter. As I spend (gulp!) nearly £20,000 a year on plastic, my annual cashback from this card came to around £110.
However, being a financial writer and Fool fan, I'm always on the lookout for a better deal. Thus, when Capital One launched a table-topping cashback card which pays 4% for the first three months and 1% thereafter, I simply had to have one. As I revealed in Get 4% Cashback As You Spend, the online application process took about three minutes, and my new card arrived a few days later.
Since then, I've spent several thousand pounds on my new cashback card. Indeed, if I spend £20,000 on this card, spread evenly across the year, then I should earn £200 in the first three months and a further £150 over the following nine months. In other words, I stand to make £350 over a year, simply by maximising my spending on this market-leading cashback credit card. Eureka!
Of course, if you play your cards right, then this method of spending really does generate free cash. However, if you don't play the game correctly, then it's easy to lose out. To make the most of a cashback card:
- Don't spend too much on it. If you are unable to repay every monthly bill in full, then you'll start paying interest at around 16% a year or so. The best thing to do is to set up a monthly direct debit to repay your entire bill.
- Don't use it for cash withdrawals, balance transfers or other non-standard transactions. Otherwise, you could end up paying hefty fees and additional interest.
- Don't buy rip-off payment protection insurance and other over-priced add-ons. They cost a lot and provide very limited benefits.
So, contrary to the perceived wisdom, my cashback credit card will pay for several free lunches and dinners over the coming year!
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