Back in my post Why You Shouldn?t Settle For a 1% Cashback Credit Card, commenter TW raised a good question:
Isn?t the best ?return? on credit card use found using a 0% on purchases card and put the money you would use to pay it off in an interest account (5.5% E-Loan account, etc.) instead of trying to use the best rewards bonus card where you?d need to pay off the monthly balance to avoid fees?
On one side, we have the interest earned off of “borrowing” at 0%. On the other side, you have plain cashback rebates. Which is better? This is a question I asked myself a couple of years ago, but due to the low interest rates back then it definitely wasn’t worth it. Now that ELoan Savings is offering 5.5% APY and other banks are close to that, I think I need to run the numbers again.
Calculations For Using 0% APR Purchases Card
First of all, you’ll need to find a new credit card with an introductory rate of 0% APR on purchases. To get an average picture, let’s say you spend an even $1,000 every month on it, or $12,000 annually (although this example would work for any dollar amount). Instead of paying the balance in full at the end of the month, you put it into an interest-bearing account. Let’s use 5.50% APY, although rates may rise (or fall) in the coming year.
Instead of nitpicking with grace periods and minimum payments, let’s say the bank interest earned is the same as taking the average, $6,000, for 12 months at 5.50% APY. This will give you a rough estimate of ~$330 in interest at the end of the year. Now, you have to pay taxes. Let’s use a 25% marginal rate.
$330 x 75% = $247.50
$247.50 earned on $12,000 of spending is 2.06% cash back.
Ok, 2%, not bad. If you spend more early on you’ll do better, if you spend more late in the year you’ll do worse.
This is the part I forgot initially – If you can get a card that gives you 0% APR on purchases and cashback, that rebate percentage can be stacked on top. Remember, cashback rebates are not taxable. So let’s say you get a card with 1% flat back on purchases, that would give you something in the neighborhood of 3% cash back.
Some other things that came to mind:
- You need a high enough credit limit fully take advantage of your spending. If you spend $500 a month you’ll need a $6,000 limit, otherwise you’ll need another card.
- Some people just don’t have the discipline to put away that money into a savings account every month. Don’t do this if this means you!
- You’ll need to get a new 0% card every 12 months to keep this up. Given the fast-changing nature of credit card rewards programs anyways these days, I personally don’t really care.
Look like TW was right. Although you get 5%/6% back on certain cards in specific categories, if you are only using one card, you really can’t beat 3% back on all purchases. Finally, if you find a card with some introductory bonus cashback offers you can do even better.
Here are some cards that would work well with this idea:
Chase PerfectCard MasterCard – No annual fee, 0% APR on purchases for 12 months, 6% cashback on gas for first 90 days, 3% on gas after that, and 1% back on everything else. Rebates credit monthly directly to statement.
Discover Open Road Card – No annual fee, 0% APR on purchases for 12 months, 2% back on gas.
Chase Home Improvement Visa – No annual fee, 0% APR on purchases for 12 months, 3% back on home improvement purchases, 1% back on everything else. Free laser level with first purchase.