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.

If you have an MBNA credit card, you may have noticed that the credit card site is no more. When you try to log in, it says that your cards should be at BankofAmerica.com. But if you have certain co-branded cards like Fidelity ones, you can only access them at IBSNetAccess.com. My other MBNA cards were automatically merged into my BofA Online Banking.

There are a variety of reasons to get higher credit card limits, including improving your credit score by using a lower percentage of your available credit, and also the ability to get more free money from credit cards, and thus make more interest. Some people say there are disadvantages too, but it’s really easier to decrease your credit limits if somehow you need to.

Sometimes your issuer will automatically increase your limits without asking, like Citibank and MBNA. But many times you need to ask and it often involves a credit check. To be honest, I haven’t very aggressive recently in getting my credit limits as high as they could be. The only thing that I do, because it literally takes 5 seconds to do, is to occasionally request an instant credit limit increase online with Citibank. It doesn’t even hit you with a hard credit pull! Here’s how:
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Although I still like my Fidelity 529 College Rewards Card and its 2% back towards a 529 account, there are some hurdles like having to set up recurring deposits and dealing with potential tax issues. But that doesn’t mean you should settle for any of those 1% cashback cards everyone else is offering! The similar Fidelity Investments Rewards Card offers you the equivalent of 1.5% cash back on virtually everything with minimal hassle.

You get one point for each dollar you spend, and 5,000 points is the same as $75 payment deposit into an eligible Fidelity account, including taxable brokerage accounts and IRAs. The beauty is that Fidelity accounts have no annual maintenance fees, so if you don’t already have an account you can just keep the balance at $0 and transfer the money immediately back into your own bank account.

The only catch is that you need to open the account initially with at least $2,500, which you can withdraw right afterwards. But, if you have $10,000 available, you can get a separate $100 bonus for opening a taxable brokerage account (IRAs don’t count). You get the $100 in about 7 days after your deposit clears according to the terms, and then you can take all $10,100 back out.

Even if you already use another card that gives you higher than 1.5% – like the Citi Driver’s Edge Card (mentioned previously) or the HSBC Rewards Card that give you 5-6% back on gas, groceries, and drugstores, if you use them together (one card for gas/groc/drugs, this for everything else), you’ll have a great 1-2 combo.

There is a 0% APR offer attached to the card as well, but it has a 3% balance transfer fee with no cap, so you can easily do better elsewhere.

Bah. I still haven’t gotten my cancellation letter from Citibank regarding the discontinued Dividend card. I don’t want to assume, but I think it’s likely just a matter of time. According to the people who have the letters, you still get 5% until October 13th, so another month and a half. Here are what I see as the top 4 3 current alternatives, in no particular order as each has it’s own pros and cons:

1) HSBC Direct Rewards Card

Pros: 5% back at groceries, gas, and drugstores with $500 annual cap. 1% back on purchases over $3,000.

Cons: Rewards only paid out annually. Only 0.5% on first $3,000 of purchases. Relatively unknown card issuer. People report having FICOs of above 700 and still being denied.

2) Citi Driver’s Edge Platinum MasterCard

Pros: 6% back at groceries, gas, and drugstores with $1,000 annual cap. 1% back on all other purchases. You also get Drive Rebates of $100 for every 10,000 miles driven, increasing potential cashback to over 7%.

Cons: Rewards redeemable in cash only towards car expenses (tires, repairs, parts, etc.) or student loans. Otherwise redeemable as gift cards or gas cards. 6% only for first 12 months, 3% after that.

3) Chase Cash Plus Rewards MasterCard

Pros: 5% back at groceries, gas, and drugstores with $300 annual cap. 1% back on all other purchases. $50 bonus after first purchase.

Cons: I thought they killed this card. Like the Citibank card, there is no mention of it on the website. This specific application link appears to work, although it is unknown if the rewards on this card will also become extinct in the near future.

I already got the Citi Driver’s Edge card before all this Dividend doom and gloom, so I’m already switched. It’s working out well since I’ve already sent in my first mileage documentation and I’m going to be driving a good deal this summer. According to my calculations, I’m getting over 7% cash back due to the mileage rebates. Instead of trying to time it to get free tires, I’ll probably just take the easy route and get gas gift cards.

A possible strategy to get to $50 cashout mark for Dividend owners is to buy some gift cards at the grocery store you usually shop at anyways. For example, I could just buy a $100 Safeway card, get the $5 back, and wait until after October 13th to use it.

Here is the 3rd half of questions submitted to me. Yes, 3rd half. I thought I could finish last time, but some of the comments had 6 questions within one comment 😉 Not a problem, just took another post. This should just about finish my series on How To Make Money From 0% APR Balance Transfers (index of all posts).

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Here is the 2nd half of questions submitted to me. 1st half is here. All are part of my series on How To Make Money From 0% APR Balance Transfers (index of all posts). And off we go:

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