The best purchase you'll ever make

by Neil Faulkner on 08 August 2011  |  7 comments
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What's the best purchase you'll ever make? Neil Faulkner investigates.

Banks usually make money by paying us less in interest than we pay in loans. It's a bit more complicated than that, but that's the gist.

Yet they also make money whenever we use our credit cards – even when they don't charge us for it.

We spend on our credit cards and the retailer must then pay an “interchange fee” for each transaction. These fees are a massive money spinner for the banks (and the likes of VISA and MasterCard, which process the fees).

Lenders encourage you to spend more money on credit cards so that they can earn these fees. They do this by offering you a fraction of the fees in cashback and rewards. It is also one of the main reasons why banks can afford to offer completely interest-free and charge-free purchases on credit cards for more than a year, and to effectively give you free money.

The best 0% on purchases cards in the whole market

 The cost of borrowing here seems to be zero but, actually, it is better than zero. Because you are buying with tomorrow's money at today's prices, you are able to buy things more cheaply than if you waited till later, when you can expect that prices will have risen. Hence, borrowing in this way enables you to buy more. Effectively, then, you're making a profit by using your credit card for your normal purchases. That's free money with every purchase - making every purchase on one of these cards the best purchase you'll ever make. Right?

Wrong. To make these cards work for you, you shouldn't take this as an opportunity to spend twice as much as you would have done. Save the money you would have spent on your debit card or in cash, preferably in a savings account. You can then use this to pay off the card debt in the month before the deal expires. This also means you can earn interest on money you've already spent.

In addition, although you're paying no interest, you still need to pay off a little bit of your debt each month; if you miss a minimum monthly repayment, you will be fined, your credit record will receive a bad mark, and your interest-free deal will be taken away from you.

In summary, you could say that the 0% on purchases credit card itself is the best 'purchase' you'll ever make - but only if you use it correctly!

Some little extras

I mentioned some extras in my table. When looking at the rewards, a “point” is typically worth between £0.002 and half a penny. It's not much – and it certainly isn't enough to make it worth changing where you shop to earn or spend them – but it's a small bonus when you do so accidentally. This is another small advantage to using a credit card instead of a debit card.

Shopping and travel discounts through credit-card reward schemes are typically worth even less than points because they tend to make people spend more rather than save since they encourage you to buy from more expensive shops. They can be alright though for the right people though; read more on some of the rewards in these cards and others in You're missing out on £3.6bn of rewards and My first credit card.

It's worth pointing out that the Barclaycard also comes with a 14-month 0% deal on balance transfers, and the Halifax and Royal Bank of Scotland cards have a 13-month balance-transfer deal. Both cost 3% in fees. These cards are particularly suitable for people who want to take advantage of free money when making new purchases while also paying off existing debt as cheaply as possible. It is not a good idea to borrow to make new purchases if your financial situation is tight or your debts are too large to pay off completely during the interest-free period.

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