Kerry asks: “I’m thinking about putting my purchases on a 0% credit card and then put the money into a current account earning 3%. Do you think this is a good idea? What are the risks? What are the best 0% credit cards available?”
Q&A 34 – Should I Get a 0% Credit Card? – Shownotes
Today’s question comes from Kerry:
This is more of a sanity check than anything else. 0% on purchases for around two years sounds too good to pass up. My plan would be buy everything on it, pay the minimums & stick what I would have spent it on into the highest interest account I can find. Pay the entire lot back a month or two before the deal ends.
The risk of spending the money & not being able to repay doesn’t really affect me. I have ~£10k between my existing savings / broker accounts & that grows by at least £1k a month (usually closer to £1.5k). I’m in a secure well-paying job in an industry where I could lose my job on Monday & start a new one on Tuesday. I actively review my financial situation (mostly to maximise interest) every few months.
So assuming i’m not missing an obvious red flag what are the longest 0% deals I am likely to be able to get? Beyond arranged overdrafts (scarcely used through university / three available but none used for the last 18 months) I have no borrowing history. Noddle & Clearscore give me well above average ratings.
And how would I best go about this? I assume I would start with quite a low credit limit. Would there be ways to increase this? 3% interest on £1000 doesn’t seem worth the hassle but on £3000 would be). Maybe by paying off more than the minimum each month?
Thanks for your question Kerry.
Having A Lovely Little Stooze?!
What you are asking about is technically known as “stoozing”. The principle is that you borrow at 0% and then invest that money at a higher interest rate and earn the profit. It is similar to “arbitrage” in investing and is a process which can earn you some extra income. However, it doesn’t come without risks.
The first thing that you absolutely need to understand is the terms and conditions on the 0% credit card. Is it 0% on all purchases? Is there a time-frame which the purchases need to be within? When do you have to repay the debt by to keep it at 0%? Are there any minimum payments? What other conditions are there?
However, if you can confidently answer all these questions, the principle is a good one. For example, at the time of recording, the following could be completed.
Stoozing – A Real Life Example
Say you have purchases that you would be making anyway for £3,000. You can then use the Post Office credit card to make this purchase with a 0% for 27 months (as long as you make the purchase within the first three months of opening the card).
You can then set up an automated payment to make the minimum payments for 27 months. The minimum payment is the greater of 1% of the balance plus interest, 2.5% of the balance or £5. Based on the £3,000 spend, this will be £75 in the first month and then slowly fall each month.
You will then effectively be earning interest in a current account on the money that you would have used for these purchases. Based on available current accounts, this could be at 3% per annum (0.25% per month).
By the 27th month, you will have a balance on the credit card of £1,514 which you’ll need to repay in full in the last month so that you incur no interest.
Based on this example, you would have earned interest from the current account of £1,448.44 in the 27 months.
Theoretically, this takes £0 invested and only a few hours to set up and so the return is very good for your outlay.
What Are The Risks?
However, you need to think about some risks:
- Firstly, think about credit score if you might apply for other debts. If you take a credit card with a £3,000 limit and use it all, your credit score will be significantly impacted because you will be using a high percentage of your available credit – a characteristic that negatively impacts your credit score.
- How much interest can you earn? You can currently earn around 3-5% in certain current accounts, but this isn’t guaranteed to stay as high over the period?
- Any mistakes with repayments (either the minimum amount each month, or the final repayment) could be very costly.
So, you should consider the risks. But, I wouldn’t put you off stoozing completely, primarily because it’s a technique that I currently use myself!
For more detail, check out an article we wrote on how to manage 0% credit cards.
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