If you’ve got a substantial purchase coming up, like a car, sofa or a new boiler, you might think a loan’s your only choice. But nobody likes paying interest, do they?
With a few sneaky financial tricks, you could pay off your purchase in instalments and sidestep paying any interest at all by using a 0% purchases credit card.
But there’s more – with some astute financial planning, your credit card splurge could actually make you money along the way.
What could go wrong?
Quite a lot, actually.
First, we need to warn you that if you fail to make at least the minimum payment on your credit card each month, you could be stripped of introductory deals like 0% interest and you’ll have to pay default charges.
This could end up very costly very quickly and destroy your credit score in the process, so if you don’t think you can commit to repaying, this strategy isn’t for you.
You typically need a decent credit score to be accepted for 0% purchases credit cards. Repeatedly applying for credit can adversely affect your score, so be wary.
You’ll also need a card with a big enough credit limit for your purchase as, again, exceeding a limit will scupper your credit score and rack up fees.
You can use Gocompare.com’s smart search tool to see which cards you’re most likely to be accepted for to help avoid unsuccessful applications.
1. Plan your attack
Planning is crucial for success.
The first thing you need to do is check that your retailer of choice accepts credit cards and doesn’t levy a hefty fee for processing them.
For this strategy, you’ll need two financial products: a credit card offering 0% on purchases and a savings account.
As an example, we’re going to purchase a sofa with a £2,400 price tag.
The most competitive credit card deals at the moment are offering a 27-month interest-free period on purchases – giving us a little leeway to repay our sofa in 24 monthly instalments of £100.
Compare savings accounts at Gocompare.com with the ‘easy access’ box checked to find the top-paying suitable account – currently the top rate is 1.65%.
2. Automate your repayments
There’s always a risk involved with financial jiggery-pokery of this sort, but you can seriously mitigate these risks by automating everything via internet banking.
Having made your big purchase, the first thing to do is to set up a direct debit to make the minimum repayment on the card.
The minimum repayment is usually either a percentage or a set figure; whichever is the lower amount – for instance 1% of the balance or £5. Check the terms and conditions of your card to find the minimum repayment.
For our sofa, with those minimum payment terms, we’d set up a monthly payment of £24 at the outset (1% of the balance).
Next, divide the cost of your purchase by the number of repayments you want to make.
Even though the longest 0% cards offer 27 months, being diligent financial types we want to repay our sofa in two years, so £2,400 divided by 24 is £100 a month.
Minus the £24 of the minimum payment, that’s £76 left to repay each month.
But instead of repaying it immediately, this money can be stashed in savings.
So next, set up a standing order sending this remainder to your chosen savings account each month.
That’s it – one standing order and one direct debit and everything is automated to avoid charges and fees.
3. Don’t mess with the system
The final step – and we can’t emphasise this enough – is to leave the savings alone and don’t spend them.
Start removing money or cancelling those important direct debits and standing orders and you could find yourself with a shortfall when the 0% period ends. Then you’ll have to pay interest on the remaining balance – which defeats the object entirely.
4. Reap the benefits
With our sofa, sticking £76 a month in a 1.65% AER savings account would amass approximately £1,853.
Minus our £24 a month repayments, the credit card would still have a balance of £1,824.
The savings should be used to repay this balance, leaving around £29 profit.
Buying the sofa on a credit card has actually made money, while benefitting from manageable monthly repayments, all for the sake of 10 minutes of internet banking.
Why stop there…?
Ok, so with a 30 quid profit over two years, your credit card isn’t exactly paying for your lavish lifestyle.
But the financially astute and confident – such as keen current account savers – and those with top-paying regular savings accounts linked to their current accounts could potentially achieve interest on the savings of 5-6% AER.
With a 5% return, buying the sofa on a credit card in this fashion would earn around £90 in interest over the two years.
That’s more than enough for a natty set of scatter cushions.
Compare credit cards with Gocompare.com