# Interest savings by using creditcard

#### theos86

Hi,
I always read about people using their credit card to pay for living expenses throughout the month and putting all wages into an offset account to save on interest. I have made a few calculations based on a simple example and wanted to make sure my thinking was right.

Example
Mr Smith wants to know how much interest he would save per month on his home loan if he put all of his wages into his offset account and used his credit card to pay for living expenses. The credit card is paid on the due date (ie no interest paid).

Assumptions
Income: \$5000 per month net of tax (he gets paid monthly at the beginning of the month)
Living Expenses = Income (ie does not save)
Credit Card: 30 days interest free, due at the end of the month.
Interest rate on mortgage: 5% pa
Mortgage repayment: Interest only

Month 1
Day 1: Account balance \$5,000
Day 30: Account balance \$5,000, minus credit card payment (\$5,000) = \$0

The interest saved by having money in the offset for the month is [\$5000 x 5%]/12 = \$20.83

Month 2
Mr Smith now has surplus funds of \$20.83 as he saved on interest from previous loan repayment.
Day 1: Account balance \$5,000 + \$20.83 = \$5020.83
Day 30: Account balance \$5,020.83, minus credit card payment (\$5,000) = \$20.83

The interest saved is [\$5,020.83 x 5%]/12 = \$20.92

Month 3
Day 1: Account balance \$5,000 + 20.83 + 20.92 = \$5041.75
??????.And so on.

I have done a quick excel spreadsheet and after 12 months of this the interest saved over the year is \$234.

I just wanted to make sure my thought process was correct. Saving on interest is always good but it is a lot less than what I thought it would be by using this method.

Your thoughts on this are appreciated.

#### datto

Lets see now. Day 1 account balance \$5K.. If you withdraw cash from your CC you are charged interest from day 1.....no?

#### theos86

In this example they are paid on the 1st of the month, hence the \$5,000 offset account balance. No cash out on the credit card.

#### datto

But you are going to need cash somewhere. Maybe there is another source of income? That's the sticking point I can see.

Then there is reward points. That's a plus. Is it a free cc? no annual fee?

#### Terry_w

Yes, looks correct calculations.

Can you factor in someone spending say \$4000 and saving \$1000 per month?

#### albanga

I use this method with a points card.
My wife and I are going to Bali next month.

Interest saved = + \$20.98
Wife seeing extra money in offset account because everything is paid on credit + wife seeing 50,000 frequent flyer points = - \$3000

Savings = - \$2979.02

Point being the method is great if you treat the credit card as strict as you would treat your normal savings account.
Paying it off without interest is the easy part, it's not using it when you shouldn't is the hard part.

Credit card surcharges fees easily eat up interest savings and points and most transactions have them now.

#### theos86

Yes credit cards ARE evil for a lot of people, but for those that are diligent with their spending they can save that little bit of interest and possibly get a little reward from reward points.

#### TMNT

credit cards can be a great money saving or 'bonus' accumulating tool,

for those that think a credit card is free money (yes there are many typical aussies that think like this....asbsolutely insame in my opinion) a credit card is a dangerous option,

when I started off, I used my credit card as a temporary tool to get me into the next months pay check when I ran a bit short on cash or got a big expense, but I paid it off every month

plus the points were awesome!!

#### Big Will

Hi,
I always read about people using their credit card to pay for living expenses throughout the month and putting all wages into an offset account to save on interest. I have made a few calculations based on a simple example and wanted to make sure my thinking was right.

Example
Mr Smith wants to know how much interest he would save per month on his home loan if he put all of his wages into his offset account and used his credit card to pay for living expenses. The credit card is paid on the due date (ie no interest paid).

Assumptions
Income: \$5000 per month net of tax (he gets paid monthly at the beginning of the month)
Living Expenses = Income (ie does not save)
Credit Card: 30 days interest free, due at the end of the month.
Interest rate on mortgage: 5% pa
Mortgage repayment: Interest only

Month 1
Day 1: Account balance \$5,000
Day 30: Account balance \$5,000, minus credit card payment (\$5,000) = \$0

The interest saved by having money in the offset for the month is [\$5000 x 5%]/12 = \$20.83

Month 2
Mr Smith now has surplus funds of \$20.83 as he saved on interest from previous loan repayment.
Day 1: Account balance \$5,000 + \$20.83 = \$5020.83
Day 30: Account balance \$5,020.83, minus credit card payment (\$5,000) = \$20.83

The interest saved is [\$5,020.83 x 5%]/12 = \$20.92

Month 3
Day 1: Account balance \$5,000 + 20.83 + 20.92 = \$5041.75
??????.And so on.

I have done a quick excel spreadsheet and after 12 months of this the interest saved over the year is \$234.

I just wanted to make sure my thought process was correct. Saving on interest is always good but it is a lot less than what I thought it would be by using this method.

Your thoughts on this are appreciated.

Yup you are correct.

If you were going to withdraw cash you would use an eftpos card to do it but \$100 here and there will not make a huge dent in the overall figures.

Just need to be aware of annual fees, surcharges and other fees.

#### tess85

I put all my spending on the c card. it works if you are disciplined and helps if auto-payment is set automatically to pay off the amount required so you don't earn interest.

Be aware, up to X interest free days (where X = 45 or 55) is just a maximum and you can't always get all transactions falling on the magic date that gives you the highest max period... unless you time all transactions on a certain day.

You can get additional benefits with the right rewards scheme. I have an Westpac Altitude Black card and I sometimes pay a credit card fee of, say, 0.4% (eg NSW land tax) if my Mastercard gets me 0.55% worth of Bunnings gift cards back. For Amex I calculated the return to be 1.65%. With those percentages I haven't even considered the interest benefit from having the money for an extra month or so.

#### tobe

Theres no savings in this example, as he spends all of his money every month.
In fact, giving him a credit card is more than likely going to result in him spending more than he earns each month.

Remember, the data credit card companies rely on says about 80% of people dont always pay off the credit card every month. This is where they make their money, along with the purchases people make on credit they may have postponed or not gone ahead with if they had to find cash. These people dont think they are being suckered, they think of all the savings they are going to make using the interest free period on their credit card, or the points etc.

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