Is 0% APR On Purchases Better Than Cashback?

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:

  1. 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.
  2. 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!
  3. 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.

Conclusion
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.

I am leaving out cards that have no-fee balance transfer offers, as it would be more profitable to max those out for the full 12 months via balance transfers.

Comments

  1. One of the things I’ve noticed in the calculations which involve borrowing at 0% (and depositing those funds into an interest bearing account) is that they all omit one very important variable: the PITA factor, or at least that’s what I call it. PITA stands for Pain In The Ass, and it’s a very real line item that I consider in any of my financial transactions.

    While I understand that everyone values this differently, for me it’s not worth the time or risk (PITA) of forgetting when the 0% rate changes to 16% and getting hit with the interest charges… just to make a couple hundred $s on the 12-month float.

  2. Never really thought about the taxes from the earnings and comparing it to cash back credit cards. I was going to do the 0% balance interest, but it’s just another card I have to keep track. Right now I’m using 3 credit cards
    1) 2% back on everything
    2) 5% back on gas, drugs and groceries
    3) 3% back on restaurants

    It just seems like if I keep getting more cards that it’s more hassle than it becomes worth. Of course even lowering your credit score

  3. SavingEverything says:

    Hmmm. There’s more to it: you forgot my state’s income taxes, and probably yours. (some people even pay a tiny portion of their income to local city tax.) And, it also depends on how much of spender you are to maximize on the cashback-rewards with this offer, and of course a high credit limit (and utilitizing whatever is leftover from your normal yearly creditcard spendings for high-yield savings). Very interesting idea!!

  4. I recently got a Chase card with 0% balance transfers and 0% for 12 months on purchases. Since Chase bought of bunch of companies with whom I had other cards I managed to get a 61,000 credit limit that I moved to the new card for a total of 69,000. I maxed the balance transfer (one note – the max transfer is 35,000, so I had to do 2, each with a $75 fee). I removed one fee after the fact though. I pay ~1400 a month which allowed me to take full advantage of the 5% cash on grocery/gas 1% on everything else after one month. The best of both worlds!

  5. Nice write up on the subject. =) I didn’t think my opinion would generate a new blog posting here, but I hope it helps readers see other ways to generate bonus bucks with credit cards.

    Personally I keep a tally of credit card debt versus money in online savings. Whenever I get more debt than savings, I throw more money into the savings to balance it off. Otherwise, I pay off other debt with the extra money (mortgage payment).

  6. How about 21% cashback to some retailers and restaurants using 0% apr Credit card on purchases?
    Here is what i do:
    I sign up on program such as backporch.com, using my AmEx card.
    I get 1% cashback for my purchases of gift cards to major retailers
    such as Bestbuy, Circuit city, etc. They have a limit of how many you can buy. It costs $8.95 to join but free for the first thirty days. I got all the gift cards i can, they cancel the plan so i don’t have to pay any fees.

    Just how crazy my saving is, here is a really good example:
    I bought a $25 gift certificate for Bennigan’s restaurant for $20.
    On monday and wednesday, they have special entree for $4.99.
    I order that with water to drink. I have a press pass that give me 20% off on the $4.99. So it comes out to be 3.99 + .45 tax + $2 tip(50% tip..wow!haha) = $6.44. I gave the waiter my gift certificate, to my suprise he gave me back 25 – 6.44 = $18.56 in cash. Come to think of it, i paid the meal for only $1.44. If i take it the cashback 1% and 0% apr CC, i think i ate there for free. Actually, i look at this as a hobby of beating the system. i make decent money..hehe :P

  7. I think the PITA factor is largely dependent on the person, and therefore impossible to measure here. For example, the only thing different here is that you have to remember when the 0% ends and pay it off. In this day of Outlook and e-mail/cellphone alerts, that’s not too hard to automate. That’s worth a couple hundred dollars to me :) But to each their own.

    Otherwise, you continue to buy stuff on the card, and pay your bill (minimum payment) once a month. That’s the same that you’d do with a regular cashback card (make purchases, pay off bill each month).

    Backporch charges an annual fee, right? I can’t find it on their site.

    Anyhow, lots of cashback options out there, I just like to tinker with all of them!

  8. If you want to do the calculation the easy way, just divide the return you will get in half. Then your 5.50% interest becomes 2.75% (at which point you can take into account taxes, as appropriate).

  9. Anthony–what cards offer this 21% cashback?

  10. Also, is it a normal occurrence for the restaurants to give you cash back from the gift card? Or was that just a 1 time thing?

  11. By the way, if you have state income taxes, T-Bills still pay a rockin’ tax-equivalent yield right now, over 5.50% for most states.

  12. NoTalent Says,

    There is no card. you buy gift cards that is 20% off. There are many programs for that. For example, on that backporch program website, you can sign up, and order gift cards. I got three Bennigans gift cards, three home depot GCs, three Best Buy GCs, three Circuit city GCs. Each card is worth 25$ but it only cost me $20 each once you are on the program. Once you order all the cards, you can cancel your membership, hence you do not pay membership fee. There are many programs out there. I am on four different programs already. Just sign on, get the maximum gift cards, then cancel your membership within thirty days. The phone number to sign up is on backporch.com

  13. In response to DorkyDad I would say it is well worth $4000 pre-tax (in my case at least) per year and dittoing Jonathan – automated reminders will never lead you astray.

  14. Just wanted to say good job! This introduces a new interesting twist in the “screw the credit card companies” game! I only wish I had thought to run the numbers myself first! =)

  15. Mike (not I) & Jbo both report receiving 5% cashback on drugs & groceries. I thought that kind of generous return went out when Citi acquired ATT Universal. Who issues this 5% card?

    BTW, I tend to share Dorkydad’s view on 0% transfers. All that huffing & puffing for a couple hundred bucks a year is a PITA. Time for something new & different, say I.

  16. It’s the first of the month, and E-Loan doesn’t list any accrued interest. Does anyone know when they post it?

  17. E-Loan posts on your monthly anniversary.

  18. I have the Chase Platinum Rewards card – I signed up for it because of the whole Citibank situation. I had no expectation of getting 0% for 12 months and on purchases, that was some nice icing. Also, the first purchase gets you an immediate $50 reward.

  19. I just checked chase.com/creditcards & the best I found was Chase Freedom (in either Visa or M/C version), paying $3 cashback, which is OK but still short of that elusive 5%. And no sign of a $50 bonus for an initial purchase mentioned by my namesake Mike.

  20. I’m pretty sure the $50 bonus thing Mike is talking about is gone.

    I talked about it in my alternatives to Citi Dividend post, but the link doesn’t work anymore. link

  21. Cashback cards are great for people who have to travel a lot for work. I’m a consultant and I travel (at minimum) every other week. I have a Credit Card that gives me cash back and I get reimbursed before I get hit with any interest. It’s essentially free money for me, with zero PITA factors.

    I take that money and put it aside in a high yield savings account.

    I also calculate how much money I save by not being home very much (Groceries, Gas, etc) and I put that aside in a high-yield too. As busy as I am, I need things to be very simple in my financial life, socking away cash back and “cash efficiency” savings by not being home is an easy savings vehicle for me.

    -M

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