Cashback credit cards can make you money, but you could make even more using this simpe technique.
I don't like it when I'm forced to supplement my income by dipping into my savings account. However, as a freelance writer, I have both a modest basic salary and a highly irregular income. Thus, sometimes I don't have any choice but to fall back on my savings to keep me in the black. Naturally, in the good times, I put spare cash back into my savings in order to keep them at a reasonable level.
Still, I'm been thinking of ways to shrink my expenses in the short term, in order to keep my savings balance high. My monthly credit-card bill is one of my largest expenses, as it usually exceeds £1,000. The reason why my spending on plastic is so high is that I put all purchases -- no matter how large or small -- on my Best Buy cashback credit card. I do this because I earn 4% cashback on all of this spending, although this is about to drop to 1% when my introductory offer ends next month.
However, I've come up with a cunning plan to curb my credit-card bill for the immediate future. Instead of continuing to use my cashback credit card, earning 1% of my spending as I go, I'm going to switch to using a 0% on purchases credit card for at least the next twelve months. Indeed, by switching to a credit card which offers an extended interest-free period on new spending, I can delay repaying most of my balance into 2008 or even 2009.
Let me explain what I mean: with a standard credit card, I can enjoy an interest-free period lasting from 45 to 59 days -- but only if I always pay off my monthly bill in full. Alas, this interest-free credit isn't terribly attractive to me, because it still relies on me repaying my entire balance each month.
On the other hand, if I start spending on a 0% on purchases credit card which charges no interest on purchases for, say, a year, then I can pay just the minimum monthly repayments (MMRs) and still avoid interest on my growing balance. For example, let's say that I start using a Best Buy 0% on purchases credit card, such as one of these beauties:
Card | Length of 0% period | Typical APR (%) | Minimum monthly repayment |
|---|---|---|---|
12 months | 15.9 | 2% (£5) | |
12 months | 15.9 | 3% (£5) | |
Sainsbury's Bank MasterCard | 12 months | 2.25% (£5) |
For instance, if I switched to spending £1,000 a month on a Halifax One credit card, I could avoid interest on purchases for up to a year. Of course, if I didn't have to make any repayments, then I'd end up with a balance of £12,000 to clear just before the interest-free period came to an end.
However, I have to pay a minimum of 2% of my balance each month. I've calculated that over the space of a year, my monthly repayments will total £1,236. In addition, I'll need to make a final payment of £10,764 in order to clear the remaining balance before interest kicks in.
So, as you can see, instead of having to find monthly repayments totalling £12,000 over the past year, I can get away with repaying just £1,236. Thus, I can leave the remainder of each monthly credit-card bill in a high-interest savings account, such as the easy-access Icesave account, which pays 6.30% AER. By my reckoning, keeping this extra cash in my savings account will earn me more than £300 over the next twelve months, which is well worth having!
One final word about this strategy: whatever you do, don't overspend on 0% on purchases cards, or use them for balance transfers or to withdraw cash. Otherwise, you could end up paying high rates of interest on these transactions, which defeats the point of having a 0% card in the first place!