Save Money With Credit CardsCredit Cards are a useful and convenient tool to use for purchasing all manner of items. Most people tend to stop there, treating their credit card as a useful alternative to paying with cash, but you can go so much further with the humble credit card! By following a few simple steps you can use your card to save you a whole bunch of cash.
Note however that the following tips only apply if you are financially secure enough to be able to pay off your credit card bill at the end of the month. If you cannot afford to do this then you should not be using a credit card. Under normal circumstances if you do not pay your monthly bill in full then you will be clobbered with between a 15% and 30% annual interest payment. To make matters worse this interest payment is compounded monthly. As an example, if you spent £500 a month on your credit card and didn't make any repayments, then at the end of 12months you would have an initial debt of £6000, plus another £530 in interest charges, making a total of £6530 worth of debt (assuming interest payments of 20% APR).
If you do pay your credit card bill off in full every month, then well done to you, not only are you ensuring that you do not fall into a spiral of credit card debt, you are actually saving a little bit of money as well. How so you may ask?
Interest Free Credit
Credit Cards usually give between 30 and 60 days interest free credit. I.e. you could buy something at the start of 1 month, and not actually have to pay the bill till the end of the next month, 60 days later. This means you have some additional money for up to 60 days after you have spent it!
The clever bit is if you keep this money in a high interest savings account you can earn around 6.25% interest (as of Dec 07 using a Halifx web saver) on the money that you have already spent on a purchase, but have not had to give to the credit card company yet. Even with small purchases this can soon add up to a real saving. Going back to the £500 a month spend on your credit card, if you pay the amount off in full each month, whilst keeping your money in a high interest saving account, you could earn an additional £30 a year in interest. For doing nothing other than remembering to pay you bill on time!
Using Cashback with Credit Cards
With a concept known as cashback things can get even better. Quite often credit card companies will offer to credit your account with a percentage of the purchase you make. This is typically a pretty small amount, ranging from 0.25% up to 1%, but sometimes there are special offers on, for example Capital One card offers 4% cashback for the first 3 months, then 1% onwards (Nov 07). Using this cashback offer, and spending £500 a month on your card you will receive an additional £120 in your wallet, again for doing nothing. Add this to the £30 worth of interest free credit you are getting, and suddenly you are up to £150, just for using the convenient credit card.
Extended Interest Free Period
Some credit cards offer extended introduction interest free periods, often up to 12 months or even 18months in some cases. This allows you to make purchases that you do not need to pay for until the end of the interest free period. During that time the credit card company is effectively loaning you the money for free! All you need to do is use your credit card as normal, but instead of paying the bill off each month, but the money in your high interest savings account, and earn a bit of extra interest. At the end of the 12 months take the money from your savings account and pay off the credit card bill. If you have a 12 month interest free offer and spend £500 a month on your credit card, then this will earn you an additional £197 in interest. Surprisingly this is an even better deal than the cashback offer, and from time to time you may find a credit card company that offers you both cashback and an extended interest free period.
You must be very very careful when using this tactic to save money when using your credit card. At the end of each month you should religiously ensure that you have put enough money into the savings account to pay off the credit card bill. If you don't then things could begin to slip out of control and at the end of the 12 months you could end up with a massive credit card bill and no way to pay it. If, for example, you spend £500 a month on your credit card, then after 12 months you will owe £6000. With a typical interest charge of 20% you will end up paying over £90 a month in interest. After a couple of months this interest charge will dwarf any savings you made from cashback or interest free credit and you will be slowly sinking into credit card debt.
As of Dec 07 Halifax are offering a good credit card with 0% interest for 12 months, as well as a web saver account offering 6.25%. The web saver comes with a catch however, you can only make 1 withdrawal a year. This is actually perfect, you can put enough money into the web saver to cover your credit card bills and you shouldn't be tempted to dip into these savings as you'll lose your interest bonus. At the end of the 12 months interest free rate on your credit card you can use your 1 withdrawal a year allowance to take out enough money to pay off the credit card, and perhaps use all the additional interest you earn to buy a treat for yourself?
Credit Card Summary
Look out for good deals on credit cards, extended interest free periods are particularly good and usually outperform any cashback schemes. However you must be very careful to ensure you put the funds into a high interest savings account and have sufficient savings to pay off the credit card bill once the interest free period has expired.
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