In February 2013, I will be moving a significant amount of my savings to pay off my credit card debt. I’ve been using this credit card since October 2011 and it was my first credit card that I didn’t pay off in full every month. Why didn’t I pay it off in full every month? Because this credit card only charges interest when you don’t make the minimum repayment each month. At the end of 15 months it will revert to the usual 19.9% APR interest rate and will force me to make repayments in full. What I’m doing is by no means a new technique but I’m just one of many who are taking out 0% credit cards and using them for day to day expenses.
When I pull out my credit card amongst friends who are less financially savvy (and previously my parents) I’m often greeted with a look of shock. I’ve built a reputation for myself amongst my peers for being ‘obsessed with money’. To my more financially savvy peers, I’m just a personal finance junkie leveraging debt or to those who do the same – a credit card tart. I first learned about using 0% credit cards from Money Saving Expert, Martin Lewis who goes into detail about how to be a credit card tart.
The steps are simple:
- Take out a 0% credit card (the 0% rate usually lasts between 12 and 15 months, some now offer this rate for 18 months but your credit rating has to be very good to qualify)
- Use the card to pay for your usual every day expenses (but without taking cash out at a cash machine or ATM)
- Move the money in your current account that would usually pay for every day expenses to a high-interest savings account (transaction by transaction)
- Meet the minimum repayment each month (to avoid getting charged)
- At the end of the 0% interest rate period, use the savings put aside especially for the credit card to pay off the outstanding debt and pocket the interest that you earned whilst it was sitting in a savings account
Can anyone do this?
When I first tried to take out a 0% credit card, I wasn’t so lucky. I got instantly rejected as I’d had no credit before and therefore the credit agency did not feel I could qualify. In a bid to improve my credit score I decided to take out a standard credit card from my primary bank at the time. I used this to pay for around £50-100 of expenses each month and set-up a direct debit from my current account to pay it off in full each month (thus avoiding any charges). I did this for a year* and then reapplied for the same 0% credit card. Armed with a better credit score this time I got instantly accepted.
*This isn’t necessarily the minimum amount of time required to build up a good credit rating. I could have tried after 3-6 months but decided I wanted to be 100% I’d get accepted so went for a year.
Trial, error…and greed
As I already had savings, I decided I’d rather keep all of my savings in one high-interest savings account. At the time, I was happy with my decision because who wouldn’t want to earn the most they could on their savings? Why bother putting the money into a separate account that pays a bit less in interest than the one where most of my savings sit? I was called out on this by one of my peers who asked how I’d accounted for the debt repayment in my records. I didn’t have an answer. The problem with not keeping the repayment fund separate from my normal savings is it was hard to keep track of what these savings were going towards and therefore more difficult to track the exact rewards reaped from credit card tarting. I knew I was earning interest on money that wasn’t mine but I couldn’t say much more than that. I’ve learned that the way to go when using any type of debt is to ensure you account for it. Had I done this I could have tangibly shown the peer that questioned me what I had earned in interest.
With this experience in tow, I’ve set myself a few rules for the next 0% credit card and perhaps for those who are just starting out in ‘tarting’:
- Don’t use the card to supplement what you already spend. You’re still paying for your purchases but using an alternative method of payment.
- Don’t spend the extra money in your current account – be a diligent personal account manager by moving it into a savings account as soon as you’ve paid for something on your credit card.
- Keep the money separate to your other savings accounts. You could even rename it ’0% Credit Card repayment account’.
Once this credit card has been paid off it’s back to the drawing board to find a similar credit card and restart the process of earning interest on someone else’s money.