How to really maximise your ‘cashback’ on big purchases

Want to earn a little something extra from a big purchase you’ve saved up for? A cashback credit card might not be your best option...

There are various times in life when we need to save up for a big purchase.

It might be a used car, a big family holiday or new sofas for the living room.

Regardless of the occasion, savvy shoppers will know that, rather than simply paying for it with their savings, a better option is to put it all on a cashback credit card first.

By doing so, and then clearing that debt in full, they'll get a little something back from their major outlay.

What’s more, they'll enjoy the additional protections that paying with plastic offers should something go wrong.

While this is undoubtedly a shrewd move, there’s a trick that could earn you far more cash – while also enjoying all the same protections.

Interest over cashback

To make this work, you need to open a top 0% purchase credit card instead of a cashback one.

You then move all your savings to a top access savings account or Cash ISA.

Once you’ve put your debt on the purchase credit card, you then make the minimum monthly payment each month from your savings, which will continue to earn interest.

When the 0% window on your purchase credit card ends, only then do you pay off the debt in full using your savings.

Provided it’s a big purchase, you will have earned far more in savings interest than you would have done by paying with a cashback credit card, then clearing your debt upfront.

How much can you earn?

To see how these two strategies compare, let’s start by looking at roughly how much you can expect to earn by paying for your purchase with a top cashback credit card.

If you already have such a card, the most you are likely to earn is 1% of the value of your purchase.

If you are willing to apply for a credit card specifically for your purchase, you can earn a more generous rate of cashback.

Amex has the top offer at the time of writing, offering 5% cashback during the first five months.

Crucially, the amount you can earn is capped at a maximum of £125 during this introductory period.

So you’re realistically looking at earning 1% of your purchase price or £125, depending on which option you choose.

Top purchase and savings options

Now let’s look at the alternative strategy.

At the time of writing, there are a few 0% purchase credit cards available that charge no interest for at least two years.

As for the best home for your savings, you can currently earn up to 4.4% on an access savings account.

Most of these top savings accounts do come with a 12-month bonus, however, so you will need to move your savings after a year to keep your cash earning a top rate for the duration of your 0% credit card’s 0% period.

If you haven’t used your ISA allowance for the year and are worried about paying tax on your savings interest, you could opt for a Cash ISA instead of a traditional savings account.

These offer particularly generous rates of up to 4.5% at the time of writing.

Again, the top ISAs generally come with a 12-month bonus, so you’ll need to move your money again in a year’s time.

We don’t know how much savings rates might change in the future, but with this strategy, you can expect to earn roughly 4% interest on your savings over a period of two years.

Keep in mind that your savings pot will shrink slightly over time as you make the minimum credit card payments each month, gradually reducing the amount of interest you earn.

What’s more, each lender’s minimum monthly payment is different, so the speed at which your savings pot shrinks will depend on the 0% credit card you choose.

Which strategy is best for earning extra cash?

As a rough rule, the more expensive the purchase, the more reward you’ll get by using a purchase credit card and holding onto your savings for longer.

Let’s look at a few examples to see how these strategies stack up in pounds and pence.

Example #1: £2,500 purchase

Say the item you’ve saved up for costs £2,500.

By using your existing cashback credit card, which pays a rate of 1%, to cover the purchase and then clearing the debt with your savings, you’d earn £25.

Had you applied specifically for a top new 5% cashback credit card from Amex, you could have earned a more impressive £125.

However, by holding onto your savings for longer and putting your purchase on a top 0% card, you could have earned between £150 and £160 in interest before clearing your debt in two years’ time.

While this strategy is the overall winner in this scenario, the fact that it also requires the most effort might put some people off.

Example #2: £5,000 purchase

In our second scenario, that shiny item you’ve saved up for has set you back £5,000.

Using your existing 1% cashback credit card and then clearing the debt will earn you £50.

Applying for the top cashback credit card from Amex paying 5% would theoretically earn you £250, but remember, the maximum amount you can earn is capped at £125 during the introductory period.

Had you opted instead for the strategy of paying for your purchase with a top 0% card and holding onto your savings, you would earn roughly £315 to £360 over two years.

That’s comfortably more than double what you could pocket using cashback cards.

Example #3: £10,000

Let’s imagine that purchase of yours is a whopping £10,000 in our third, admittedly more extreme, example.

Assuming you had the credit limit to cover it, putting that spend on your existing 1% cashback card would earn you £100.

Opting for the new 5% cashback card would only earn you a slightly higher sum of £125 because of the aforementioned cap.

By contrast, using the purchase credit card strategy would net you between £630 and £720 in savings interest by the time you cleared the debt in full.

A few things to consider

While this trick is clearly worthwhile, especially on larger amounts, it’s really only suitable for those instances where you’ve saved up for a big purchase.

If you’re looking to earn cashback from a bunch of smaller purchases, this option will soon get too convoluted and the value of the savings interest you earn will diminish the closer you get to the end of your purchase credit card’s interest-free window.

You also need to factor in how much tax on savings interest you might be liable for when using this strategy.

Finally, you need to ensure you have an excellent credit rating to qualify for one of the top 0% purchase cards required to make this strategy work.

If you’re interested in trying it out and want to get an idea of how worthwhile it might be, take a look at this savings calculator from The Calculator Site.

It’ll show you how much interest you can expect to make over time while making regular withdrawals.