Make free money with this clever credit card
According to APACS, the UK payments association, the use of debit cards in Britain is on the up.
Recent statistics show that, while credit card spending has stayed the same and cheques have fallen out of favour, debit card use rose 9% in 2008. It accounted for almost three quarters of all plastic card transactions, which added up to a staggering £254bn worth of spending.
Among the reasons for this rise is, of course, the credit crunch. Lenders are now less keen to give consumers new credit cards, and many of us are keen to stop relying on the ones we already have. This means our Switch, Maestro, Delta, Solo and Electron debit cards are more likely to be used instead.
But is using a debit card really the smartest way to spend?
Play your cards right
Debit cards are perceived by many of us as the ‘safest’ option when it comes to paying with plastic.
This is because using a debit card to pay for something is like writing a cheque for a transaction. Debit cards are designed to draw on funds that are in your current account, and as a rule won’t push you into debt (unless, of course, your purchase means you enter your overdraft).
However, when it comes to picking the perfect plastic, matters aren’t as simple as ‘credit cards bad, debit cards good’.
While some credit cards are poor choices for everyday spending (for example, those without an interest free period), the right one could help you rake in hundreds of pounds of free cash over a year.
A clever cashback alternative
Anyone who uses their debit card to meet day-to-day expenses (spending on petrol, food, train tickets etc.) – and can afford to cover these outgoings each month – may want to consider ditching their debit card in favour of a cashback credit card.
That’s because all the purchases you make on a cashback credit card are rewarded by the card provider, who will pay you back a proportion of what you spend.
How does it work?
Every year, on the anniversary of the date you opened the account, a cardholder’s cashback entitlement will be calculated by their credit card provider.
Then, the money they are entitled to will be sent to them in the form of a cheque, or credited to their card.
If you had a card that offered 1% cashback, for example, you’d get 1p back for every £1 worth of purchases.
As you can see, the process is simple – and depending on how much you spend, it’s easy to earn hundreds of pounds a year simply by swapping your debit card for a cashback credit card.
What’s the catch?
As long as you use your cashback credit card according to the following rules, you shouldn’t be stung by any nasty catches.
1. Always pay off your card in full, before your purchases start accruing interest. If you don’t, the interest you’re charged on your spending will by far outweigh the cashback benefits you receive.
2. Ensure you make repayments on time, and avoid exceeding your credit limit. Cashback credit card providers tend to treat customers who break these rules harshly, and may withdraw your cashback benefits if you do so.
3. Set up a direct debit that will pay off your total card balance each month. If you do this, you should avoid making the mistakes explained above.
4. Never withdraw cash using a cashback credit card. You’ll receive no cashback benefit for withdrawing money from a hole in the wall. Even worse, the rate of interest you’ll be charged for taking out cash is likely to be extortionate – and you may also be charged a fee.
My top cashback choice
In my opinion, the top cashback credit card currently available is the American Express Platinum cashback credit card.
New cardholders will earn 5% cashback on spending of up to £2,000 during their first three months. After this promotional period ends, they will be entitled to cashback as follows:
• 0.5% on spending of up to £3,500;
• 1% on spending of between £3,501 and £10,000; and
• 1.5% for spending in excess of £10,001.
To be eligible for this card, you’ll need a good credit history and annual earnings of at least £20,000 per year.
To maximise your cashback benefits during the first three months, you might consider applying for a second card for your partner (i.e., making them an ‘additional cardholder’). This way, you’ll earn 5% cashback on all his or her transactions as well as your own.
Your partner could even apply for a second American Express Platinum card in their name once your bonus cashback period is over. This time, you could act as the second cardholder – enabling you to earn 5% on all household spending for a second three month stretch.
However, you should only ever do this if you trust one another completely. That’s because additional cardholders’ debts are always the responsibility of the person who signed the original credit agreement. This means that, irrespective of who made the transactions, you would have to pay off money spent by your partner if he or she refused to cough up, because you applied for the credit card and additional card in the first place.
An extra advantage
Finally, spending on a credit card offers additional protection that the majority of debit cards do not. This is because transactions of between £100 and £30,000 are covered under Section 75 of the Consumer Credit Act.
Under these rules, if you purchase goods that are misdescribed, faulty or do not arrive you can seek redress from your credit card provider as well as the company who sold you the items.
With many businesses now less stable than they were before the recession, this protection is an added bonus for cashback credit card users.
**This material is for information purposes only and should not be considered financial advice. We strongly encourage our readers not to rely solely on this content, but to seek independent advice when making financial decisions.**
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