Since the topic of cash back debit cards came up with the recent ING Direct 1% cash back offer (temporary promotion), I thought it was a good time to talk about how I am using my PayPal debit card to earn 1% cash back on my purchases all of the time.

I have had this PayPal account for a number of years, but rarely used it for everyday purchases. Last month it occurred to me that I could start transferring my spending money there as a way to help budget my spending (similar to the envelope system) and earn the 1% cash back bonus.

Not only do you earn cash back on purchases, but the money sitting in your PayPal account earns interest too (currently 4.88%). It is free to transfer money to and from your checking account, but it does take 3-4 business days so always give yourself plenty of time. You can make instant transfers, but I believe you can only do so with a fee.

For part of the month of October (only about two weeks of the month), I earned $5.35 cash back on this card. That isn’t a lot of money, but if you think about the interest you earn on regular checking and savings accounts, it’s a pretty good return on your dollars (it certainly blows away the interest earned on my small emergency fund). I put this money in my passive income fund, a category I am always looking for ways to grow, so I am working hard to try to maximize the bonus.

My plan for November is to use it a lot more and I will pay all of the bills I can with it, such as utilities and any other merchants who will accept it. I think I’ll earn quite a bit more this month and I will share the details next month. It takes some planning to get this done right because of the delay in transferring money so I started by looking at the money I would need to spend for the first two weeks of the month and made that transfer as early as I could.

Risk: Here is the biggest caveat, PayPal accounts are not FDIC insured! If PayPal fails and I lose my capital, all of this effort will be for nothing. For that reason, I don’t keep a lot of money in the account- only what I expect to need to spend for the month on things I can buy with a debit card. That being said, the fact that Ebay owns PayPal and PayPal is used all over the Internet for processing payments takes away most of my fear that it will go out of business.

I know there are better deals out there on rewards credit cards, but if you don’t want to use credit cards, this 1% deal is quite nice. Like any debit card, you can use it anywhere that takes credit. The cash back appears instantly on your account with each transaction that clears.

If you want to sign up and don’t yet have a PayPal account, you can use the link below to check it out. This is an affiliate link and I will get a bonus for new accounts. I didn’t write this post to try to earn a bonus, I only figured that since I’ve given PayPal this free promotion the least they could do is send me a little money.