Am I barking up the right money tree?
January 1, 2018 5:51 PM   Subscribe

How should I divide my credit card and debit card spending in order to best take advantage of interest from my checking account? (Or is this even the game I should be playing?) I’m able to earn 1.58% interest from a checking account if I use my debit card for twelve transactions each calendar month. But, of course, I can keep my money in the bank for longer by using my credit card. What decisions or equations will help me best maximize the interest I earn?

I have a checking account that earns an APY of 1.58 if I use my debit card for twelve cleared transactions each calendar month. My usual strategy is to use my debit card for “everyday” purchases, and make up the difference with $0.50 Amazon gift card reloads. (I know some people have concerns about minimal-amount transactions, but I haven’t run into any trouble.)

I know how much I’d need in my account for the interest to exceed to equal or exceed $6 in Amazon reloads if I decide to just “play the game.” The rest of my spending, though, is water under the bridge; I’m obviously not expecting to earn it all back in interest! What I don’t know is if I’m doing myself a disservice by not just keeping money in the bank by using my credit card.

--I don’t earn any points or rewards with my credit card.

--I may consider applying for a rewards card. My credit union offers one with no fees, but I’d like to at least wait until I know I could meet the minimum spend requirement for bonus points ($3k in two months). I’d probably be making a large PayPal payment to a small business or private individual in order to qualify, and I’m not even sure if that would count? I’m also not totally sure what cards I’d be approved for (I currently use a subprime store card).

--I have a savings account that earns 0.10% APY.

--My credit union also offers a tiered savings account with a higher interest rate, which I’ll look into if this checking account doesn’t pan out long-term. I’d be earning 0.20% APY initially, and could see myself moving into the 0.25% category as my savings grow.

--I’m…not too worried about security or other protections when it comes to debit vs. credit; I’m not skittish about using my debit card. It’s purely a financial decision.

--Checking and savings are all the same to me. I can easily transfer funds between accounts, and I don’t seem to spend differently based on where I’m keeping my money at a given moment.

--No unavoidable fees or minimums (other than starting balance) on anything I have or am considering. Dividends for interest-earning accounts are compounded and credited monthly.

--Now that I’m earning interest, my credit card strategies include: generally put bigger transactions on credit, pay off my statement balance only, and make a single payment just before the deadline. I suspect I have good credit.

--It looks like Amazon gift card reloads are the smallest desirable purchase I could make online, but I’ve noticed some cheaper items in stores, like candy, that I could use to “play the game” if needed.

--I’m probably not ready to start investing. It looks like even the cheapest low-risk options that are likely to pay a worthwhile amount would take up too much money that I need to keep available. Tell me if there’s a chance I’m wrong, though!

--Again, I know the amount I earn will never equal the amount I spend, but please kindly point out if it’s simply going to be too minimal to be worth worrying about. My thinking is that I’m leaving money on the table if I don’t pursue it, even if it’d amount to a drop in the bucket.

I’m not sure if the information given points to a clear answer or if perhaps there are equations I can do? More tracking of spending? To sum up, my questions are: am I being a smart cookie by using my debit card in a way that maximizes the interest I earn in my checking account? Or am I better off switching to a savings account that earns a lower rate, and using my credit card more heavily to keep my money in the bank for longer? Am I giving up “free money” by not finally pursuing a freaking rewards card already? Any suggestions regarding the size, type, or timing of discretionary purchases I should make on a given card? Or am I just straight-up missing something obvious?

We’re talking small money here in every respect; I can provide more details if relevant.
posted by Carouselle to Work & Money (8 answers total) 2 users marked this as a favorite
Best answer: There is value of your time to the money. You haven't given any monthly spend amounts so it's difficult to say whether 1.58% interest will generate more than a snickers bar worth of returns per month. Let me be clear though, "it's simply too minimal to be worth worrying about".

The effort you have put into thinking about the returns here indicates you care strongly, but perhaps not enough about the value of your time. Working a single extra hour on the clock is likely to yield more than your monthly gain from the credit/debit games. Also, risking carrying debt on the cc is just asking for trouble. If you miss a single payment by a single day, all your 1.58% gains are wiped out. And the price is eternal stress and vigilance for a 'measly couple bucks' (assuming you aren't carrying millions in your checking account. Similarly, I've come to the conclusion that credit card "points" and "rewards" are more trouble than they're worth. I'd rather spend time with my SO or watching Netflix or enjoying my time than trying to 'win' a rigged game.

Bottom line, keep the debt on the credit card at zero or work towards that direction as fast as possible. After you are at zero, build up savings in your checking account and only use the credit card in emergencies. Once you have $500, open a low-fee trading account to start investing your money. While you are trying to figure out how to invest, park the money in an S&P 500 index ETF fund like symbol 'SPY'. Add more as you are able. Take a look at the average yearly returns for the S&P. It's around 12% a year, averaged for 30+ years.
posted by misery loves company at 6:11 PM on January 1, 2018 [2 favorites]

You have spent longer writing this post than you should have spent on this situation total...unless this is actually fun for you. In terms of actual money, there is no way this really matters. As above - in order, clear off debt. Work up some minimal savings. If you're nervous about it, keep it in an online savings account or a CD (you can clear that same 1.6% right now doing the latter, and I'm sure better rates may be available elsewhere). No fiddling with random transactions required. After that, there are a ton of reasonable options depending on your employment situation, bogleheads and mr money mustache are the places I like to read (and sometimes ignore, but them's the breaks). Again - unless it is fun for you to munchkin this, if you aren't already making 12 debit transactions a month, I'd ignore it.
posted by annabear at 6:15 PM on January 1, 2018 [5 favorites]

Often a bank or credit union will offer you two tiers of credit cards. The first will have a lower interest rate but no rewards. The second will have a higher interest rate but a 1% or 1.5% cash back for all purchases. If you are sure you can pay off your balance in full each month, the second card is the winner because you will never pay interest and you get cash back.

Personally, I always look for a cash back rewards card. The travel and merchandise rewards never seem practical.
posted by JackFlash at 6:25 PM on January 1, 2018 [1 favorite]

Quite aside from spending an inordinate amount of time pondering this decision, there is an element of "beating the bank at its own game" that I too would find appealing.

Assuming that your checking account pays no interest at all if you don't use your debit card twelve times in a month, then your best bet is to use the debit card at least (but not many more than) twelve times a month for small purchases that you would make anyway. If you use your debit card to purchase something you don't really want/need, then you've thrown away more money than you could possibly gain.

Everything of a more major nature should be put on your credit card, assuming that you are prepared to pay the full balance off every month without fail. Getting a no-fee rewards card is a Good Thing, even if you don't spend enough to get the sign-on bonus points. Look at it this way: a rewards card that pays you 1-2% on every purchase is essentially giving you an instant discount. My personal favorite is the DiscoverCard because I can turn $40 worth of bonus points (which amount to "free money") into $50 worth of gift cards for a store I will shop at anyway (hence even more free money).

Even if all of these machinations end up making only a little money for you, there's a sense of satisfaction in knowing you've done the very best for yourself money-wise. Also, you're establishing a good sense of discipline that will serve you well when your cash flow is greater.
posted by DrGail at 7:22 PM on January 1, 2018 [1 favorite]

I’m not skittish about using my debit card.

You should be. If your card is skimmed you will completely lose access to your account and any funds in it that the thief spends, and it can take weeks to get those funds back. Never use your debit card for purchases.

I’d probably be making a large PayPal payment to a small business or private individual in order to qualify, and I’m not even sure if that would count?

It might get flagged as money laundering.

point out if it’s simply going to be too minimal to be worth worrying about.

It's too minimal to be worth worrying about. Credit card (or store card) interest can exceed 20%, which will cost you much more than any 1.58% APY would earn you back.

I suspect I have good credit.

Don't suspect, find out. If you have only one subprime store card, your score is probably not high. If you're paying it off in full every month and your utilization is low you might be a candidate for a better card, but it's easy enough to find out.

Am I giving up “free money” by not finally pursuing a freaking rewards card already?

It doesn't sound like it. My wife and I do take advantage of rewards cards, but our spending patterns sound very different than yours. Rewards cards are good if you're already spending the money anyway and you can just shift around how you're spending it in order to maximize benefits ("oh hey, put restaurant spending on the Chase Freedom card this month"). You shouldn't allow them to induce purchases you wouldn't make otherwise and possibly can't afford. If you regularly spend $1500 or more per month and you can pay it off in full when the bill comes, then a rewards card might be worthwhile.

In conclusion: make sure you're not paying interest on any debt, stop using your debit card for purchases because it's unnecessarily risky behavior, find out your credit score and maybe get a better card than what you have, but don't worry about rewards cards just yet.
posted by fedward at 6:33 AM on January 2, 2018 [1 favorite]

Best answer: How amenable are you to moving some of your accounts out of your CU?

As has been mentioned, debit cards are unnecessarily risky to use for the bulk of your spending.

An APY that high seems unusual for a checking account, but you can get a similar benefit from a high-yield savings account. The hoops you have to jump through to access that rate are way too burdensome.

I would consider doing the following:

1) Open a high-yield savings account (APY 1 to 1.25%). Ally Bank is an online-only bank that offers this. There are several other good choices as well.

2) Move most of your cash to your savings account. Keep enough money in your checking account for 3-6 months' of expenses, max.

3) Stop using your debit card for routine purchases. Only use it for ATM withdrawals, money orders, etc.

4) Open a cash back rewards credit card. The Capital One Quicksilver card is a good option here (offers a blanket 1.5% on all purchases). Most other credit cards will offer 1% on most purchases, which is also quite good. Use this credit card for the bulk of your purchases. Pay it off ON TIME, IN FULL every single month without fail. Accrue no interest.

Basically, you might consider using your savings account for interest, and using your credit card (paid in full) for cash back. You may not want to rely on your debit card/checking account for routine payments/interest because of the associated risks and onerous requirements.
posted by aquamvidam at 6:46 AM on January 2, 2018 [1 favorite]

I use a rewards credit card for everything (I earn 2% on all credit card purchases) and I pay in full every month. I also earn 3% interest on my checking account balance if I make 10 debit card purchases every month. So it's in my best interest to make those 10 transactions because I'll make $35-40 per month in interest if I do, but to keep them minimal because I'm losing out on the 2% when I don't use my credit card AND if that cash stays in my account it earns interest.

My rule is, if it's under $5, I use my debit card. I do use the Amazon gift card reload if I'm not at the transaction limit at the end of the month, I have a calendar reminder set to check the transactions and make it up with Amazon reloads. (Some banks are stricter about manufactured spending than others, so far I haven't had a problem with it.) I also have been known to set aside one can of cat food as a separate transaction when I'm doing the weekly grocery shop so I can get a transaction that way.

Basically once you're in the habit of pulling out your debit card for tiny transactions it's not a huge deal.

Edited to add: I also have my credit card set to autopay the full balance on its due date, so the cash stays in my account as long as it possibly can earning interest.
posted by rabbitrabbit at 6:46 AM on January 2, 2018 [4 favorites]

I’m not skittish about using my debit card.

You should be. If your card is skimmed you will completely lose access to your account and any funds in it that the thief spends, and it can take weeks to get those funds back. Never use your debit card for purchases.

Strong agree. Never ever make a purchase on a debit card. Use it only as an ATM card at non sketchy locations like your own bank, as opposed to an ATM in a convenience store for example.
posted by ridogi at 11:18 AM on January 2, 2018

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