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Tuesday, September 29, 2009

How to save money - Get a credit card!

First off, please read my disclaimer post.

With that out of the way, you can rub your eyes in disbelief at the title of this post: save money by getting a credit card? You must be out of your mind!

No. Well, maybe, but hear me out:

I'm talking about a particular type of credit card: cashback. There are a few providers that will pay you a small percentage (anywhere from under 1% up to around 5% with introductory offers) of whatever amount you spend on your card.


How?
Just follow these simple steps:

1. Get a cashback credit card
Shop around, and be mindful of fees. I signed up for an Egg Money card a couple of years ago, and whilst they're still giving cashback on all purchases, new customers will also have to pay a £1 per month fee to use the card. Depending on how much you spend, you can still end up quids-in, but for some people you'll be out of pocket at the end of the month, which beats the point. This page at MoneySavingExpert.com is usually pretty up to date with regards to the best offers available, but deals change so check the facts at source before signing up!

2. Set up a direct debit to pay off any outstanding balance in full every month
This step is crucial. It's so easy to do with most companies - mine was set up automatically and operational within a few days. Why bother? It means that you automatically clear your debt every month, therefore removing the possibility of incurring interest charges. The interest charges on any credit card will be considerably higher than any cashback offer, which means that if you pay any interest at all, you end up out of pocket.

3. Use your cashback card to pay for everything
Use your cashback card to pay for things wherever possible: where you would normally pay with a debit card, cash, cheque, I.O.U, string or gold pieces, use your cashback card instead. This might sound scary, but as long as you don't usually go overdrawn and you've followed step 2 above, you shouldn't have any problems at all.


Why?
There are a number of benefits to taking this simple step. I'll outline a few of them below:

  • The biggest reason, and the whole point of this post, is that everything you buy will be effectively 1 or 2% (depending on your rate) cheaper: you'll never see this cashback in your pocket (it's usually applied to your credit card account on or near your anniversary), but less money will be leaving it in the first place.
  • To put it in perspective, imagine you're spending £10,000 every year on your 1% cashback credit card. At renewal, you'll get £100 back on your bill. This might not sound like a lot compared with what you spent, but remember that this is £100 that you wouldn't otherwise have. Every little helps.
  • You're better protected for two reasons: Firstly, the credit card is a buffer between criminals and your bank account. If a crim gets your debit card and the right details, he has access to your bank account. If he manages to get hold of your credit card, you can isolate him from your main money store much more easily. Secondly, if you buy anything over £100 on a credit card and things go wrong (including the company you purchased from going bankrupt) your credit card issuer is liable, and you have a level of insurance as standard that you just don't get paying by other means.
  • Everything you buy will be listed in one place, making it easier to see where your money is spent each month, and therefore simplifying budgeting. My credit card issuer goes one step further and automatically categorises my expenditure so I can see at a glance how much I spend each month on, for example, petrol, eating out and supermarket shopping.
  • If you regularly pay for things that you can reclaim from your employer as expenses, you'll actually make money out of this: pay for something, get cashback, then get reimbursed by your employer: Free money!

Some words of warning!
  • Don't ever, EVER withdraw cash on your credit card or use the credit card cheques that some companies send out automatically. These work under different rules, and you'll probably end up paying a fee as well as buckets of interest that far outweighs what you're gaining from the cashback portion of the card.
  • Don't transfer balances from elsewhere to your cashback card: many cashback cards have seductive introductory balance transfer rates, which is not surprising as any balance that's deducted from your card will come out of your transferred balance preferentially, meaning that you'll end up paying interest on your higher-rate spending debts.
  • Keep an eye open for fees that may be introduced. Your supplier is legally obliged to tell you if  they are intending to introduce a fee, so make sure you read any letters they send you rather than leaving them to rot on the sideboard with the rest of the post.

A top tip for anyone who's read this far!
Many cashback credit cards have introductory offers that give you an elevated cashback rate for the first few months of use. If you're shrewd, you'll apply for your card at a time which means you'll be taking advantage of the introductory rate at a time of heavy spending- just before Christmas, for example.

Please feel free to post your comments, concerns, experiences and suggestions, and if you haven't already, please read my disclaimer post.