How to make some free money

A few changes to your spending method could earn you a few quid.

With the recession biting, many of us concerned about our spending habits have resorted to cutting up credit cards and using cash instead. And for those at risk of getting into debt this is a wise move.

But what about those who trust themselves to be sensible and always pay off their balance in full each month? Do credit cards still have their place?

Indeed they do. After all, not only do credit cards provide us with Section 75 protection, you could benefit from a number of extras, too.

For example, if you were to move all your spending to a reward/cashback credit card you could make a bit of money each time you spend.

Of course, you must remember that you're simply switching from a debit card to a credit card. You still can only spend money that you have - this is not an excuse to spend more (and get into debt). The card must be paid off in full each month or it'll cost you more than it saves.

Reward credit cards

Most of the larger retailers have their own credit cards that give loyalty points, for example. And if you pick one from a store you shop in regularly you'll earn points faster (most favour in-store spending).

Plus, as points usually convert to store shopping vouchers you'll need to be able to spend them on things you'd normally buy.

In the chart below, I've looked at three popular reward credit cards - John Lewis, Marks & Spencer and Sainsbury's.

Each offers the chance to earn points that convert to pounds, which are issued as shopping vouchers three or four times per year (Nectar points earned with the Sainsbury's card can be spent from the Nectar card).

Note that I haven't included the cards' APRs as anyone who can't afford to pay off their bill in full each month (and therefore have to pay interest on the outstanding balance) shouldn't apply for one of these cards.

So say you spend £700 each month using your debit card and were to switch to using one of the listed credit cards. Assuming you spent £150 of this in-store (or at one of its partners), with the remaining £550 elsewhere, over the year you could earn up to £51 worth of shopping vouchers with the John Lewis or M&S cards.

Sainsbury's scheme is slightly more complicated. As you earn Nectar points you need to take out a free Nectar loyalty card as well. You earn two points for every pound spent in Sainsbury's stores on the credit card, and a further two points per pound on your Nectar card.

All points are added to your Nectar card and can be spent directly from it. And with the spending pattern given above you could earn a total of £42.60 to spend in store (although Nectar points can be used in a number of different ways).

However, it's worth noting that as you could earn £18 worth of Nectar points from the free loyalty card alone, the credit card is less lucrative.

And all of the cards offer 0% deals for certain periods.

Interesting. But how much could you earn with a bog-standard cashback card instead?

Cashback cards

I took a quick look at the two current cashback credit card market leaders according to Moneyfacts - the American Express (Amex) Platinum Cashback card and the Bank of Ireland's Moneyback MasterCard.

The former operates a tediously complicated tiered cashback system - 5% cashback on your spend during the first three months (maximum £100 cashback), and after that, 0.5% cashback on the first £3,500, 1% on £3,501 to £7,500, and 1.25% for spending over that.

Plugging the numbers into my spreadsheet revealed you could earn a maximum of £158.25 over the first year.

The Bank of Ireland's offering gives a less generous 0.5% cashback for all spending up to £15k, which equated to £42 cashback over the year.

One hit wonder

Although the Amex cashback seems to offer a great rate of cashback, remember that this is a one-off as the 5% tier only applies in the first three months of taking out the card. Remove this (in the second year) and the cashback would reduce to £68.75.

Amex rules

Amex have other rules too - not only do you have to earn £30,000 per year in order to qualify, you need to spend at least £3,000 annually on the card or you won't get your cashback. And woe betide anyone who fails to spend on the card for a year - they'll be slapped with a £20 dormancy fee. Yikes.

And unlike the Bank of Ireland card which is a widely accepted MasterCard, many retailers will not take American Express cards.

That said, earning at least £42 in cash for just carrying out your normal spending isn't bad.

Reward/Cashback card?

So which is best?

I don't think it is cut and dried. Some of us prefer to earn good old cash that can be spent anywhere, while others love the idea of saving up shopping vouchers for an annual splurge in their favourite store (you could even buy your Christmas presents with them).

And don't forget, I've only looked at retail credit cards - rewards can include Airmiles, airline miles and all manner of goodies. It all depends what works for you.

But if you are good with your money it may be worth investigating reward and cashback credit cards and earning a little something back for your spending.

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