Is it worth living off Credit Card while rest of money into offset strategy

Well, tried doing the numbers and this strategy that many people advocate. doesn't really seem to stack up. Maybe i'm doing my numbers all wrong - in which case it would be good for someone to have a look at.

- Lets say I spend $600 pw all up to live (single person)
- I purchase everything on a 0% interest for 45days CC and pay balance off every 6 weeks (42 days)
- Meanwhile, the $600pw cash is sitting in an offset account at 5.11%pa

going off these numbers I would save per week:

$600*5.11%/52 = a grand total of 59 cents per week

kind of doesn't make sence if you take into account CC fees, posibility of late payment fines and hassles involved in setting up and running strategy. Then why do people promote it.

or maybe like I said at the start, I have my numbers/calculations all wrong.
 
I do it for ease. Everything goes on the card and I pay it off each month (no interest).
It's just easy to have direct debit on most bills and I don't need to carry lots of cash.
My CC costs me $75 a year. I used to use the points for frequent flyers. Now I just get gift cards. I'm not much of a spender and had to search for things to buy. Now I get the caltex ones for petrol or give them as presents. I get a few $100 a year in cards.
 
i currently have enough point for $700 bunnings gift card ... tempted.

i find it convinient, pay everything on the card - auto payment comes out of offset account on due date - nothing to remember.

i think you calculated your saving on $600/yr rather than $600/wk:

$600 x 52 = $31,200/100 x 5.11% = $1,594.32

even taking annual fee into consideration you'd save around $1,500/yr or $30/wk.
 
I see that with interest rates at record lows such systems don't work as well as they do when interest rates are high.

Most people that use this method place there whole wage into the offset account not just there day to day expenses.

All calculations above are also incorrect.

Here is the correct way to calculate:


Amount x 5.11% / 52 = savings for week

Add up totals to get period (6 week) savings


Week 1 $600 x 5.11% / 52 = $0.58
Week 2 $1200 x 5.11% / 52 = $1.18
Week 3 $1800 x 5.11% / 52 = $1.77
Week 4 $2400 x 5.11% / 52 = $2.36
Week 5 $3000 x 5.11% / 52 = $2.95
Week 6 $3600 x 5.11% / 52 = $3.54

$12.38 per 6 week cycle

52 / 6 = 8.66

8.66 x 12.38 = $107.21 yearly saving
 
A couple of things to note here

You don't make a payment to your credit card every 6 weeks - it is actually every month you make a payment after the initial 42 day interest free period...Let me demonstrate

1 January 2010 - 31 January 2010 Account period
Payment required by 12 Feb 2010.
Meanwhile the next statement period started on 1 Feb and runs to 28 Feb, payment then required on 12 Feb 2010
Next statemen period started on 1 Mar - 31 Mar, with payment required by 12 Apr.

As you can see - a payment is required every month at the same date - not every 6 weeks.

Using Offset account on loan
usually there is a fixed minimum payment each month that is made up of the principal repayment and calculated interest
eg a monthly payment of $1000 may be made up of 100 principal repayment and $900 interest.
When you use an offset account, the savings are deducted from the loan balance (calculated daily) to give you a "Net owing amount" of which interest is then calculated.
By building up your offset account balance, you reduce the amount of interest charged and increase the amount paid back as principal.

eg $10,000 in the offset account may reduce the interest component by $42 ($10,000 x 5.11%/365 x 30 days).
So the monthly repayment of $1000 is now made up of $142 in principal and $858 in interest charges.
Therefore by building up your offset account to reduce the interest charges, actually increases the amount of money paid back as a principal repayment, which then reduces the loan balance and which then reduces the interest charged (regardless any funds in the offset account in the next month)

Therefore in order to calculate the real savings you need to take this into account (the actual savings made, the increase in principal/interest proportion each month) and the compound effect of those savings.

To say it only saves 59c a week is incorrect as it saves you paying future interest on that extra principal amount for the life of the loan.

I use the strategy - live on credit card, leave my wages, rent, business income etc in my offset account and pay the credit card off each month on the last day of interest free period. I have found you do need to be strict with your budgeting or you can find yourself adding things to your credit card you would not necessarily buy, therefore negating any potential savings.

I find using a credit card is a great way to track my spending each month, review it and make changes as needed - all my spending is entered into MYOB to track.

There is a lot of value in the rewards cards - my wifes credit union issues a rewards card where instead of points, you accrue real money on your "Rewarder" card, which you can use at any time, any place to spend - just like a debit card. Points are accrued on a similar ratio as my CBA card where i am limited to certain stores to spend my "rewards".

Hope this helps

OSS
 
A couple of things to note here

You don't make a payment to your credit card every 6 weeks - it is actually every month you make a payment after the initial 42 day interest free period...Let me demonstrate

1 January 2010 - 31 January 2010 Account period
Payment required by 12 Feb 2010.
Meanwhile the next statement period started on 1 Feb and runs to 28 Feb, payment then required on 12 Feb 2010
Next statemen period started on 1 Mar - 31 Mar, with payment required by 12 Apr.

As you can see - a payment is required every month at the same date - not every 6 weeks.

Using Offset account on loan
usually there is a fixed minimum payment each month that is made up of the principal repayment and calculated interest
eg a monthly payment of $1000 may be made up of 100 principal repayment and $900 interest.
When you use an offset account, the savings are deducted from the loan balance (calculated daily) to give you a "Net owing amount" of which interest is then calculated.
By building up your offset account balance, you reduce the amount of interest charged and increase the amount paid back as principal.

eg $10,000 in the offset account may reduce the interest component by $42 ($10,000 x 5.11%/365 x 30 days).
So the monthly repayment of $1000 is now made up of $142 in principal and $858 in interest charges.
Therefore by building up your offset account to reduce the interest charges, actually increases the amount of money paid back as a principal repayment, which then reduces the loan balance and which then reduces the interest charged (regardless any funds in the offset account in the next month)

Therefore in order to calculate the real savings you need to take this into account (the actual savings made, the increase in principal/interest proportion each month) and the compound effect of those savings.

To say it only saves 59c a week is incorrect as it saves you paying future interest on that extra principal amount for the life of the loan.

I use the strategy - live on credit card, leave my wages, rent, business income etc in my offset account and pay the credit card off each month on the last day of interest free period. I have found you do need to be strict with your budgeting or you can find yourself adding things to your credit card you would not necessarily buy, therefore negating any potential savings.

I find using a credit card is a great way to track my spending each month, review it and make changes as needed - all my spending is entered into MYOB to track.

There is a lot of value in the rewards cards - my wifes credit union issues a rewards card where instead of points, you accrue real money on your "Rewarder" card, which you can use at any time, any place to spend - just like a debit card. Points are accrued on a similar ratio as my CBA card where i am limited to certain stores to spend my "rewards".

Hope this helps

OSS



Totally Agree...

My calculations were based on - 45 day interest free period - info provide from thread maker; and I/O loan.
 
This imho is the best part of paying everything thru credit card:

1. Download transactions from bank.
2. Put them into spreadsheet.
3. Sort by description column

Voila, you can easily see (and total up) how much you spend at Woolworths, Bunnings, etc, every year.
 
CC fees.....

Oh heck, what are they? :confused::p

Cheers,

The Y-man

p.s. actually , we do have fees on 2 of our cards - one has fees redeemable from points, and the other has a domestic flight between capital cities (except Perth!) in exchange for the fee (we worked out the flight was more expensive, so it was worthwhile)
 
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