5.2% cashback (or when NOT to use a 0% card)

bignoise

For a while I've had the HSBC card offering 0% on new spending for 12 months. When I got it, I started using it for my everyday spend, whereas previously I was using an Egg Money card for the 1% cashback.

I was thinking about it recently and wondered at what point through a 12-month interest-free period does it become better value to get the 1% cashback from Egg Money, compared to just putting the money in a savings account and earning the interest on the money that you're NOT paying back on the 0% card (until the 12 months is up, of course - when you pay it off completely like a good moneysaver.)

Plugged it into Excel to find out... For these figures I've assumed 1% cashback, a savings interest rate of 6.5%, a basic rate taxpayer (20% tax on savings interest) and a 0% duration of 12 months.

If your 0% card is all shiny and new and you're in the first month, then any spend you make on it is effectively getting you "cashback" of the full annual rate of interest. That's 5.2% after tax.

That rate drops each month - 4.77% in month 2, 4.33% in month 3, and so on, because you're only getting a shorter period of time at 0% (because you're paying it all off at the end of the 12 months, right?) - but it's still pretty good, better than even the best cashback cards. By month 6 you're still getting 3.03%, 2% in month 8.. and the 10th month is the last month where you're exceeding 1% return on your spend.

This obviously only works if you credit your savings account by an amount equivalent to your spending, needless to say.

So if you've got a 12 month 0% card, don't use it for the last two months. Use a (1%) cashback card instead to maximise the payback from your monthly spending. [And if you're a higher rate taxpayer, it's the same, except it's three months instead of two.] Ah, and I didn't really take account of minimum payments because that'd make my brain stop. Maybe someone can work that bit out properly!

Obviously the maths all change if you get more/less savings interest, or a shorter 0% period, but as a general principle I thought it was interesting...

MartynwithaY

Hi Bignoise

I've been doing exactly the same thing with my HSBC and Egg cards! I plan to apply for the Amex 5% cash back card soon after my HSBC 0% expires. This pays 5% for the first 3 months and 1.5% (I think) there-after. This complicates your calculations even further but it's all free money!

Martyn.

fagun

I don't think that a shorter 0% period makes any difference, assuming no BT fee. You would still want to swap over at 2/3 mths to a 1% cashback card (or earlier if getting more cashback).