With savings rates improving, can you beat cashback rates?
Pretty much every time I spend money, I’m making money via a cashback or reward card. They might only be small amounts each time, but they really do add up and can be worth more than £100 every year.
But with savings rates improving, you might want to ditch your cashback card in favour of a different hack where you borrow interest-free to spend, while saving the money you would have spent to earn interest – something known as stoozing.
It does require more effort than just paying via a cashback card, but if you can get a good enough rates on savings, it can make you even more cash. Here’s how it works.
What is stoozing?
There are a few ways to “stooze” (weird word, I know). Fundamentally you’re borrowing money at a low rate, ideally 0%, and using that cash to earn interest at a higher rate elsewhere. So you’re making money on money that’s not even yours to start with.
With interest rates on savings pretty poor for such a long, this tactic has only offered marginal gains, if any. But after a series of base rate rises pushed up the return of the best savings accounts it’s now back as a serious option.
Any borrowing at a low rate to save at a higher rate works, but there are three key ways you can stooze: 0% purchase, 0% money transfer and 0% balance transfer.
0% Purchase stoozing
The first requires you to get a 0% purchase credit card which you use for all your spending. This is the method that would replace a cashback credit card.
All your spending on this card would be at 0% for a set period of time. At the moment that could be as long as two years, if not a little more.
So let’s say you spend £15 on this card, you’d then move that same amount to your chosen savings account. And repeat for all your other everyday purchases. But rather than pay off the card at the end of the month as you would with a cashback card, you keep on doing it.
Since you’ll need to keep adding money to savings, you will need either a regular saver or an easy-access saver, or a combination.
Then at the end of the 0% period, you’d transfer the money out of the savings account and use it to clear the full debt.
0% Money transfer stoozing
The key alternative is a money transfer credit card. These cards will give you a lump sum, up to the credit limit, and transfer it to your current account. You can then whack that full amount into a high-paying current account.
The big benefit here is you’re really not spending any of your own money at all. You take their cash and you save it. And since you have all the money upfront, you can take advantage of higher paying fixed-rate savings accounts.
Say you get £2000 transferred to your account for 12 months, and you can then save that for two years at 4.5%, you’d make £90 in interest.
However, there are a couple of restrictions. First, you’ll normally only get 12 or 18 months on these cards, much shorter than the 0% purchase cards.
Second, these cards will always come with a transfer fee, usually around 3% to 4%. When you factor that cost in (it’d be £60 to £80 on £2,000 at those rates), it really reduced the amount you’d make.
0% Balance transfer stoozing
A final of three methods to stooze is to use existing credit card debts – including those you’ve built up with either 0% purchase or 0% money transfer stoozing. When you get close to the end of the initial 0% period, you’d move the balance to a 0% balance transfer credit card.
This extends the time you’ll be able to keep the money in savings, so you can make even more money. And the length on these can be pretty decent too.
Some of the longest cards will come with a transfer fee, so are best avoided. But you can still get close to two years where there’s no transfer fee, meaning it’s free to keep saving.
The other big issue here is that there’s no guarantee you’ll be able to shift this debt. So you need to ensure you don’t commit the savings to a long-term fix that can’t be accessed if you need to pay off the card rather than transfer it.
Of course you can stooze any form of borrowing where the rate is lower than what you can get on savings. That’s still pretty hard to do, though not impossible.
When I was a student I was able to put some of my student loans into high-paying interest accounts as (back then), it worked out I’d make money on the cash until I needed to use it. Current students could do the same with their 0% overdrafts, though it’s important not to fix the savings if you think you’ll need to access the funds.
And when we redid our kitchen a few years ago, though we saved up in advance to pay for it, I opted for 0% finance and kept that money in an interest-paying account. My motivation was more to give us some leeway in case of emergencies, but as they didn’t occur, I was able to keep it saved up for a full 12 months and earn a little interest on top before I had to clear the debt.
Rules of stoozing
Make a minimum repayment every month
If you are stoozing borrowing from a credit card, and perhaps some loans, you’ll need to make a minimum repayment every single month. This is usually a percentage of the debt, or a set amount (perhaps £5), whichever is higher.
Fail to do this and you’ll probably face a penalty charge, and maybe have the 0% period terminated. So you’ll want to make sure you have a direct debit set up to pay this every single month.
This will also slightly reduce how much you move into savings, but it’s unlikely to be too much so I wouldn’t let this put you off.
Move your money to savings
If you’re going with the 0% purchase credit card form of stoozing, you need to ensure you actually do move the equivalent spend over to your savings account. That’s easier said than done.
Doing this for every purchase might be a bit of a pain. Are you really going to remember to move £1.50 over here, and £15.33 over there each time you spend? Probably not.
It might be better to choose to move larger combined amounts over on a daily, weekly or even monthly basis. That will of course slightly reduce your return, but only marginally.
But it’s vital you do this as otherwise you’ll not only miss out on the interest, you could end up spending money twice. This is when you look at your bank account and think you have more money available to spend than you actually do.
Remember to clear or transfer the balance
You’ll also need to repay in full at end of the 0% period, unless you transfer it to another card. So, as mentioned above, you need to make sure you do save the cash and are able to access it when needed.
But this is pretty easy to manage, so as long as you do it them you can successfully stooze – up to a point.
Choosing the best savings account
You’ll obviously want to go for the highest paying interest rare, and I’ve listed these here. But there are a few considerations.
First is when will you need to access the money. Higher rate will be available in fixes, but you won’t work on money saved while using 0% spending cards until you’ve reached the credit limit.
Though you can move onto these at that stage, make sure you don’t fix for longer than the 0% lenght remaining on the card.
You’ll also want to watch how the amount of interest you’ll earn (and when it’s paid) will impact your Personal Savings Allowance. If there’s a chance the extra interest could be subject to tax, consider an ISA which is competely tax free.
Barriers to stoozing
There are a handful of conditions that come with these credit cards that could get in the way.
First up, each card you get will have a credit limit. And you won’t know what it is until you’re accepted. This can severely restrict your ability to stooze.
Say you get a limit of £2,000. If you’re putting all your spending on the card – petrol, supermarkets, going out and more. That might be eaten up in two or three months. Yes you could apply for another 0% purchase card to carry on spending, and then another, but there’s no guarantee you’ll get some or all of those cards.
You also need to watch for “up to” promises on the lengths of 0% cards. If this is how it’s promoted, you might get a shorter period, which will in turn reduce how long you can earn interest on the money you save.
Stoozing and your credit rating
Let’s be frank, stoozing won’t be good for your credit rating. Other lenders will only see that you owe money on a card (or more) and are only repaying the minimum each month.
They won’t know that you’re stoozing, or that you have the money stashed elsewhere, ready to repay when required. They’ll just see the debt.
And the more you stooze, the larger the size of the debt that will show. This could very well make it harder to borrow later on. That could be a 0% balance transfer card to continue stoozing, or perhaps remortgage or get a loan.
You’ll also be credit checked each time you apply for one of these 0% cards, and that’ll appear on your report, and will also be taken into account when you apply to other lenders.
Stoozing vs cashback
Interest on savings and cashback on spending aren’t calculated in the same way. The savings AER is what you’d get if the money is put away for 12 months, whereas the cashback is just a flat rate. So when rates are similar, cashback would win if you aren’t saving for a least a year. That’s why it wasn’t worth ditching Chase’s 1% cashback and stoozing to its 1.5% interest rate.
But if you can get a much higher rate in savings than you can get in cashback, then stoozing will make you more money. And right now, you can find accounts that do this significantly.
At the time of writing, there’s a regular saver from Club Lloyds paying 5.25%, and you can save £450 a month there. Meanwhile, the best cashback card will get you between 1 and 1.2% (and that’s the Amex Gold giving a return as Nectar points). That’s a difference of £145 in interest vs £65 in cashback over 12 months.
But will you get a card that allows you to spend £450 a month for a full year, totalling £5,400? Maybe. It could even be higher. But it’s also very possible the credit limit will be a lot smaller. So unless you keep getting new 0% purchase cards, you can’t properly compare the two cards in this way.
And if you have lump sums and / or money to save each month from your salary it could be the best paying accounts are already maxed out. If so you’ll be looking at lower-paying accounts, perhaps with rates of 3% (at the time of writing). Still better than cashback rates, but the margins, and therefore profits, are lower.
Plus, some of the welcome offers from reward credit cards are hefty. Take for example the Amex Gold. This is boosted from time to time, and you could earn the equivalent of £280 from a £3,000 spend (over the first three months). That’s an equivalent rate of 9.3%. THAT beats all savings accounts.
So I think stoozing via 0% purchase cards could be a good option for those of you who have already had all the welcome deals you can get from other cards.
Just bear in mind that unless you do keep on stoozing (and your credit file is good enough to allow more applications), it’s likely to be only a short-term hack before you have to return to spending on cashback cards.
Applying for a stoozing card
Check your eligibility
It’s always worth checking your chances of acceptance via a soft check before making a full application. Many cards will let you do this, or you could try a comparison site first. That has the added advantage of showing a range of cards and allowing you to go for the card that best suits you. My credit card rules article explains more.
A handful of 0% credit cards, whether purchase, money transfer or balance transfer, could give you a little sweetner for successfully applying. This might be between £10 and £30, though you never know there might be higher ones out there.
Some of these offers will be listed on credit card company or comparison websites, while you’ll find others on cashback sites like TopCashback and Quidco.