Credit cards get a bad rap. But let’s qualify – they can be bad if spend is out of control, but …. they can be great too! Let’s explore.
I have always been pretty good at managing my money, and have got into the habit of using a credit card to do all my ‘card spend’ each month, but have a direct debit that pays off the entire amount at the end of the month.
I use a separate credit card for all my business-related expenses, which I will need to reclaim from the company each month, and do the same there. It makes it much easier to control the spend. It does mean that each month there is a hefty amount of money running through my credit cards. And that is when I realised that I could make some money for jam.
Earn cashback on purchases
I realised that I could be earning money on the purchases I make. There are number of sites which will help you compare credit cards, and be prepared that they won’t all tell you the same thing. (Secret – they are paid by these providers so their opinions might not be completely impartial!) But use a few of them, and if they correlate, you’re probably onto a good thing with that card. Here are some of the comparison sites you can use:
You’ll see that they give you the option to compare a number of things – not just credit cards that give you rewards and/or cashback. But this is where you need to be smart. You need to know that you aren’t always comparing like for like – and you might need to dust off a few of those rusty maths skills.
Some cards give good rewards, but they have annual fees. So you need to work out whether you’ll be up on the deal. You need to understand what the rewards are worth compared to the annual fees you pay. Some give you airmiles, some give you vouchers, and others give you cash.
Let’s take an example:
So this Natwest credit card gives 3% cashback at supermarkets, 0.5% at supermarket petrol stations, until 31/12/15. You also earn 0.5% for other purchases + and extra 1% if you make contactless payments, until 31/12/15.
Now, I don’t know about you, but I don’t even need to do the calculations to figure out that this looks like a BAD deal. But let’s do the maths to prove it:
- The average 4-people family in the UK spend approx £100 per week on food, so this means that between now and 31/12/15, you could spend approx £800 on food. Cashback at 3%, will give you £24 in cashback.
- Add 0.5% on fuel (assuming you fill up at a supermarket), assume 3 tanks of petrol = £150 = 75p!
- Add 0.05% on other non-contactable purchases. Let’s assume you spend £250 per month x 2 months x 0.5% = £2.50
- Right, so now and then you can pay contactless. Let’s say you spend another £100 per month on contactless payment = £100 x 2 months x 1.5% = £3
Add all this together, and you’ll earn approx: £24 + £0.75 + £2.50 + £3 = £30.25.
But the card will cost you £24 per year. After 2 years, it will have cost you £48, but you don’t earn any more rewards after 31 December 2015, which means it will cost you money in the long run! After 2 years it will have cost you an extra £17.75.
A second example:
Again, this card might not look like a sexy option, but it does pay ongoing rewards of 1.25%, with 5% in your first 3 months, and has no annual fee, so looks like a good deal. Let’s compare it to the one above:
- The average 4-people family in the UK spend approx £100 per week on food, so this means that per year that works out to be £5,200. Cashback at 5% for the first 3 months, will give you £65 in cashback.
- Add 1.5% per month thereafter = £100 x 39 weeks x 1.5% = £58.50
- Add 1.5% on other non-contactable purchases. Assume again you spend £250 per month x 12 months x 1.5% = £45
- No different rate when you pay contactless. Let’s say you spend another £100 per month on contactless payment = £100 x 12 months x 1.5% = £18
Add all this together, and you’ll earn approx: £65 + £58.50 + £45 + £18 = £186.50 in the first year, and £141 per year thereafter. As there are no fees, all this goes in your back pocket.
Remember, there are other savings to be had. If you made some of these purchases via Quidco, your savings could be even bigger! I saved more than £80 in a few months through Quidco – and of course I used my credit card to make the purchases, so I saved money twice on the same purchases!
Credit cards can be dangerous if you don’t control your spend, don’t pay off the full amount every month or buy things you don’t need. Remember all savings will disappear in a puff of smoke, if you don’t pay off the full balance, and you’re charged interest on your credit cards. Cashback is generally earned at around 1%-3%, but interest on outstanding balances is charged at rates of more than 20%! Don’t get caught in that trap.
Worth investigating though, isn’t it?