And The Tuna Says (in response to "A Good Offer?")

Dear GridMaster,

Master of the Excel spreadsheet, manipulator of numbers - You are wise and there is no need to be confused. My answer, as usual, is the same...

DO THE MATH!

To determine whether the PenFed Credit Union Rewards Card makes sense for you, there are two calculations you need to make. First, you must calculate your “earn rate”. Then, you must calculate your “burn rate”.

Your earn rate is easy – look at average % of money you spend in each of the categories (that’s ca-TE-go-ries to you and me), and calculate your weighted “earn rate”. To give you an example, I used my own situation over the past 3 months.

Here’s how it breaks down…

If I were to have a card with PedFed Credit Union, my earn rate would have looked like this over the past three months…

Pen Fed	Value	% of spend
supermarket	2.00%	18%
Gas	5.00%	10%
All other	1.25%	72%
Average	1.76%	100%

You can see that since I spent 18% of my purchases on groceries (which give 2% back), 10% of my purchases on gas (which give 5% back) and 72% on everything else (which gives 1.25% back), given my combination of spending categories over the last three months, I would have averaged 1.76% earn rate (i.e. 1.76% of my purchases are given back to me in points).

Contrast that to my current hotel rewards card…

Hotel rewards	Value	% of spend
supermarket	1.00%	18%
gas	1.00%	10%
hotel	5.00%	30%
all other	1.00%	42%
Average	2.20%	100%

With my hotel rewards, card, assuming the same % of spend in each category as above, with the separation of the 5% back on my hotel purchases, I end up averaging a 2.2% earn rate – a full 125% better than what I would have received if I had a card with PenFed. So, in other words, for me, the hotel rewards card I have is the better card strictly because of my lifestyle. But that’s me. Compare the PenFed card against a typical rewards card like Bank of America’s WorldPoints which offers 1 point per $ spend on everything, and you’ve got one stellar program – a full 176% better!

Now, I had to do some research on the redemptions side of the equation (i.e. the “burn rate”) and what I found is that the PenFed card appears to be rather competitive in terms of redemptions. For example, I can redeen 25,000 points to get a free airplane ticket in the contiguous 48 states – this is pretty typical of most card programs. Similarly, I could get a top-notch hotel room for less than 35,000 – which appears to be on-par with my own program. Merchandise, as with most other programs, translates to a poor redemption value. For example a $900 dishwasher can be had for 140,000 points - a pathetic $0.0064 per point exchange rate (remember you should be aiming for at least $0.01 per point!)

So, my dear friend – since you’re the master of the grid, you should be pretty good at finding the best card for yourself. It’s easy. Follow my lead above, and you’ll be able to determine what makes the most sense for you. If you’re not doing a lot of one particular thing, like staying in hotels or flying on major carriers, you may just very well benefit from a card like PenFed’s because it offers a great average earn rate. I appreciate your questions, and I welcome the opportunity to help. All you readers out there, just send us a note by way of comment on cardfish.blogspot.com and we can address your questions.

Happy Credit Card Shopping,

CardTuna

The Donator's Fallacy

Many of you altruistic, do-gooder types have found that you can make pain-free donations to your favorite charities such as your alma maters, animal rights groups, etc. just by enrolling in their credit card. Typically 1% of your purchases are then donated to your charity, and you never feel the pinch. It’s a brilliant and easy way to feel good about yourself and to give something back. But I have just one question for you…

ARE YOU AN IDIOT??

So, your parents spent thousands for you to get a great education at a top-notch university. Then you pay them back by showing them how stupid you can be. Why would you a) allow a multi-billion dollar corporation such as your bank get the tax deduction on YOUR money b) why would you donate less than you actually could? Or, in this materialist society of ours c) why would you forfeit the opportunity to get something for yourself (via credit card rewards)?

Let me illustrate this logic by way of a simple example…

Simon, a University of Higher Learning graduate, receives an offer in the mail for the UHL Rewards Credit Card. He learns that 1% of his purchases on the card will be donated to UHL. This makes Simon feel warm and fuzzy. He gets the card. He spends $25,000 on the card in the first year.

Simon’s bank turns around and donates $250 to UHL. The bank gets the tax deduction. Simon gets a notice that the donation was made. Simon feels warm and fuzzy.

Simon then bumps into CardTuna, I splash some salt water into his face and I force him to think about things. I point out to Simon that had he donated $250 of his own cash to UHL, he would have been able to take a deduction on the donation of about $75 (given his tax bracket). That means Simon would have really only been out of pocket only $175 on the $250 donation OR it means he could have actually donated $357 if he chose to be out of pocket $250 after his tax deduction. So, I force Simon to see that a) either HE or his alma mater are getting screwed and b) the big corporation wins.

I then rush Simon over to the nearest cross-cut shredder so he can chop his UHLRewards credit card to pieces. I advise Simon to apply for one of many credit cards that offer 1% cash back on purchases. He complies. In the next year, he takes the 1% cash back, donates it to UHL and pockets the $75 tax deduction. Now, Simon concludes that he wins, UHL gets the same benefit it would have with his now-destroyed UHLRewards card. Simon still feels warm and fuzzy, but he also feels like his UHL education was actually worth something.

Rock on Simon. Rock on.

CardTuna

What the $&^% is in the Water Cooler at Bank of America?

Okay – these guys are nuts. If you have a Bank of America credit card, you might have been unlucky enough to recently receive a mailing that tells you they’re about to raise your interest rate by an exorbitant amount (some cases more than double!)

First off, they’re a FORMER business partner of mine, and I think I can say they’re nuts especially since my identity remains rather anonymous. I could tell you stories, but I won’t. Instead, I’ll tell you if you got one of these mailings, don’t worry – it’s not because of anything you did or didn’t do (like not pay a bill). It's based on some secretive level of targeting that no one outside of the corporate walls understands.

They did this ballsy move because they told you they could, and you gave them your permission by way of accepting the terms and conditions that you unknowingly agreed to when you decided not to read your terms and conditions. The language you missed went something like this:

As required by law, rates, fees, and other costs of this credit card offer are disclosed here. All account terms are governed by the Credit Card Agreement. Account and Agreement terms are not guaranteed for any period of time; all terms, including the APRs and fees, may change in accordance with the Agreement and applicable law. We may change them based on information in your credit report, market conditions, business strategies, or for any reason.

This paragraph can be found at the very top of the terms and conditions, in itsy-bitsy type right above the interest rate section. The first part that bothers me is the part that says terms are not guaranteed for any period of time. But also note the last sentence, “We may change them (i.e APRs) based on information in your credit report, market conditions, business strategies, or for any reason“. Does anyone else find the last four words as haunting as I do? or for ANY reason? I can imagine the conference room at Bank of America now…

“Well, the kids have been hitting the lollipops a little too hard at our branches and it’s been hurting our bottom line. Jack, what do you think we should do about it?” “Well, Jim, why don’t we just double all of our cardholders interest rates? That should just about cover it!”

In all seriousness, there’s a lot of speculation about why they pulled such a stunt – they’ve got to level out their reserves after the sub-prime mess, they’re fattening up for their purchase of Countrywide, they’re trying to dump their dead-weight cardholders they inherited when they purchased MBNA (Mothers Brothers Newphews Aunts – a story for another day).

Whatever the reason, Bank of America is not only going to lose a lot of credibility in the marketplace. They’re likely to lose their shirts too when consumers catch on and plan a mass exodus when some other card company positions themselves as the savior by coming out with some offer that implies “Did Bank of America take advantage of you like a cheap whore at a bachelor party? How dare they. We’ll never do that to you. Sign on the dotted line and we’ll guarantee your low fixed rate for life”.

If you’re a victim of Bank of America’s seedy practices, I encourage you to visit our friends at Indexcreditcards.com where you can choose between 1,217 different cards to suit your needs. Choose carefully though – 26 are listed as Bank of America cards, and there’s a bunch more that are former MBNA cards. The good news is, there’s plenty more than one fish in the Cardfish sea. Finding what you need is like, well, shooting fish in a barrel.

CardTuna

To Fee Or Not To Fee? That Is The Question.

I recently read that about 70% of all credit cards do not carry annual fees. Whether or not that’s true, I have no idea. But let’s assume it is. If that’s the case, it’s quite a departure from the days of old when just about every credit card out there carried an annual fee. I imagine that savvy marketers gained a competitive edge by being able to advertise “No Annual Fee”, underwriters found new ways to make up for the quick buck and eventually, I suppose, the laws of Malcom Gladwell’s “The Tipping Point” took charge and most banks followed suit.

But what about the remaining 30%? In a world where annual fees appear to be optional, why would anyone in their right mind stick with a card that continues to stick it to them right back? Well, for many, they sadly just don’t know any better and probably haven’t done their shopping. But for others, the annual fee can be a friend, bringing lower rates, better rewards and more earning power.

You’d think that a guy who knows a thing or two about credit cards wouldn’t use one that carries an annual fee. But, guess what my dear school of fish - I do. And I’m proud of it - because it makes financial sense. Here’s why:

As you know from previous posts, my card of choice belongs to a big hotel chain and a major bank. That big hotel chain has two credit card products. One that earns users 3 points per dollar with every stay at said hotel chain’s properties. This “basic” card carries no annual fee. The other (the one I have) carries an annual fee of $65. For that $65, I earn all this:

• 5 points per dollar with every stay at the hotel chain’s properties instead of 3
• A certificate for a “free” night’s stay upon every account anniversary
• Double points on airfare, dining and rental car purchases
• A 15-night credit towards their Gold member status (which requires 50 nights stay per year, so in other words, I only need to stay 35 nights to reach Gold status).

Of course, the $65 annual fee is automatically worth it since it gives me a free night’s stay. But even if it didn’t it would still be worth it to me because I’m a heavy user. From my hotel stays alone I rack up about $6,000 in charges a year with the hotel chain. On the basic card, that would earn me 18,000 points. But on the premium fee-based card, it earns me 30,000 points. The difference of 12,000 points is enough for one night’s stay at one of their mid-tier locations – the equivalent of about $150. Plus with my airfare, dining and car rental bonuses, I’m well on my way to a second free night. So, you can see, I can easily justify paying the annual fee.

But enough about me. What about the average Joe who revolves a balance and is paying 14.99% on a card with a $7,500 limit? Does an annual fee of $50 make sense? Let’s see…

If Joe uses runs through his limit in a given year, his $50 annual fee is the equivalent to tacking on 0.67% in interest ($50/$7,500). So, his 14.99% APR really becomes 15.66%. Joe has to simply ask himself (or prospective creditors) whether or not he can get a card with a $7,500 limit and an APR of less than 15.66% all with no annual fee. If Joe can, Joe should. But if he cannot, then he should sleep soundly knowing that in his case, life with an annual fee is as good as it’s going to get.

It always comes down to the basic rule I’ve preached before and will preach again: Do the math! If you’re no good at math, have someone do it for you. And if you don’t know anybody that’s good at math, we feel for you. Your life isn’t easy. If that’s the case, just give us a shout here at Cardfish.blogspot.com. We can help. And the best part is, there’s never an annual fee!

Until next time,

CardTuna

How Low Can You Go?

The month of January 2008 was a tumultuous one, with the market bringing some huge upsets followed by a double dose of welcomed news by the Fed. First, to prevent a very ugly day on Wall Street, Uncle Bernanke cut the Fed Funds rate by ¾ of a percent after a bout of global panic that was brought on by fears of impending doom in the US financial markets. Then, during the Fed’s regularly scheduled meeting, Bernanke delivered what consumers and investors alike were expecting – another ½ percent cut to the current 3.0%.

So, what does that mean to all you credit card wielding fiends? When will your credit card’s interest rates fall and by how much?

First of all, your card interest rates are tied only loosely to the Fed Funds rate. They’re more directly tied to the Prime Rate, which as of my authoring of this article, is 6.0%. The Prime Rate, by definition, is the rate that banks charge their most creditworthy customers. Banks borrow the money at 3%, and loan out at Prime or Prime plus x%, y% or z%.

What this means for you and your credit card interest rate is dependent on a few things.

1) Do you have a variable rate card or fixed rate card?

2) What is your creditworthiness (or lack thereof!)?

3) And, do you have a floor? (Newton sure hopes so)

First, if your card is a fixed rate card, you can stop reading and go find yourself a variable rate card, unless of course your fixed rate is so good that a variable card can't currently beat it. Being tied to a high fixed rate when rates are decreasing at a time like this is just irresponsible, unless of course you’re paying your bills in full each month and you get some really great benefits from your card. By switching to a variable rate card when the Prime Rate is on the down-low, you’ll likely be able to find a better rate than what you’re paying now on a fixed rate card.

Next, many credit cards have tiered rates based on their various customers’ creditworthiness. So, if you’re a goody goody and are doing everything right, you’re probably in the “Prime plus x%” category. If you’re good but not perfect, you’re “Prime plus y%” and if you stink at paying your bills, you’re a “Prime plus z%”. Here’s an example of what I mean, straight from the pages of the Toys ‘R Us & Babies ‘R Us Mastercard (yeah, I’ve got rugrats).

Variable rate information

The following APRs may vary monthly based on the Prime Rate:^c

Purchase and Balance Transfer APR: The Prime Rate plus, as applicable, 6.99%, 10.99%, or 15.99% for outstanding and new balances after the introductory period.

^cThe "Prime Rate" is the highest prime rate published in the Money Rates column of The Wall Street Journal two business days before the Closing Date on the statement for each billing period.

So, if you’re a Prime plus x%, you’ll be paying 6.0%+6.99%, or 12.99%. If you’re Prime plus y%, you’re shelling out 6.0%+10.99% or 16.99%, and if you’re a credit-challenged, you’re forking over 6.0%+15.99% or 21.99% APR.

As for my third point, “Do you have a floor?”, I’m not talking about that questionable carpet that is host to 25 different beer stains, toe jam, dirt, dust, and a menagerie of invisible insects trying to keep warm. I’m talking about a rate floor. Simply put, a rate floor is a way for your credit card issuer to make more money when interest rates fall. They do this by limiting the amount they will reduce your interest rate when there is a decrease in the Prime Rate. My understanding is that about a third of the credit card programs out there have rate floors. Here’s an example straight from the published Terms and Conditions of one of the co-branded credit cards that I manage in my day job (to remain nameless):

Variable Rate Information. Your APR may vary. The rate is determined monthly by adding the Prime Rate and:

• 3.74%, 7.74%, or 13.74% for Purchases and this rate will not be lower than 11.99%, 15.99%, and 21.99% respectively.

The information above was published back in September of 2007 when the Prime Rate was at 8.25%. That’s how the issuing bank arrived at the various rates above.

Now if we were working with today’s Prime Rate and no rate floor, the three rate tiers would be 9.74%, 13.74% and 19.74%. However, because of the additional language “and this rate will not be lower than 11.99%, 15.99%, and 21.99% respectively”, the bank just locked in a 2.25% APR raise for themselves! So, while consumers who use this card are eagerly waiting for their interest rate to drop, it just ain’t gonna happen. Instead, the bank will pocket the spread and, well, take it to the bank!

The overall point I’m trying to make here is that you need to understand the Terms and Conditions that your credit card publishes. They’re usually printed in mouse type and they’re intentionally written to cure insomnia. Plain and simple, the banks don’t want you to read them but, by law, they have to give them to you. So, take the time to understand how your current cards work, and make changes if you’re not happy with them. And if you’re not in the mood for heavy reading, just pick up the phone and call your bank – they have to tell you how your interest rates are calculated. If they tell you that you have a high fixed rate or a variable rate with a floor, tell them that CardFish sent you, then tell them to go pound sand!

Good Luck!

CardTuna

Stacked Points

In my last article, I touted the benefits of using a rewards card on virtually everything you can, making two key points:

• Retailers build the cost of accepting credit cards into the prices of their goods and services so you should use a rewards card on every purchase possible because, in essence, you’re getting a rebate by way of points earned.

• The average reward program returns a value of about 1 penny per point.

Well, folks, I’ve been doing a bit more pondering on the subject and concluded that, in many instances, it’s possible to get more than a penny back (sometimes a lot more) for every dollar you spend. So, consider this “Part Deux” on earning points.

You see, many companies offer rewards associated with either becoming a club member or frequent user of their products or services, regardless of how you pay for your purchases (cash, debit, check, credit card). Some of my favorites are in the travel industry – airlines, hotels, and parking. Other examples include sandwich shops (buy 7, get 1 free), car washes and even dry cleaners. Used with a rewards card, you can maximize your earnings on each purchase by stacking your points.

Note: I don’t include those supermarket “club” cards because those are a ridiculous scam, since every supermarket offers them and gives you a discount right then and there for having a card – i.e. there is no ‘loyalty factor’ allowing you to earn free groceries. Anyone who doesn’t use these cards and pays the inflated price instead of signing up for/using the free card right then and there at the register is just a plain idiot.

Here’s an example of a high-value point-stacking exercise, and the math that supports it.

Since I travel quite a bit, I’m always driving down to the airport. Instead of using the parking lot at the airport, I have professed my loyalty to a national parking garage chain that offers their own loyalty/points program. The way it works is that I earn 5 points for $1 spent, and then those points are redeemable for free parking at a later date. These points are not worth $0.01 each. They’re worth more. Here’s how it works:

1 week of parking costs about $140 at this lot (~$20/day, valet)

1 week of parking using the company's rewards points costs roughly 4,000 points.

I then arrive at the value per point by the following formula: $140/4,000 = $0.035

So, on this program, I earn $0.035 back on every dollar spent with this company, just because I use their service. I use the points I’ve earned at the parking lot to get my free parking when I take my family on vacation, like on my upcoming trip to Hawaii. Of course, I am using my rewards credit card for every dollar I spend with them, earning me another penny in value back (and since I redeem my card points exclusively for hotel stays, I technically get more than 1 cent per point). In essence, every time I shop with this particular parking lot, I’m getting a total of over $0.05 back for every dollar I spend.

Here’s one more example with an airline. Pick your favorite, as most every one works the same way.

Buy a ticket from New York to LA = $400. Distance traveled is 2,500 miles.

Since most airlines start redemption at 25,000 miles, that would be 10 cross-country trips, costing a total of $4,000 to get to the 25,000 miles. If you then redeem your points for another cross-country free round-trip ticket, you’re redeeming 25,000 miles for a value of $400. That translates to $0.016 per point ($400/25,000).

Now, purchase your tickets with the airline’s rewards card to sweeten the deal…

Assume your airlines card pays you 2 points for every dollar you spend for purchasing your tickets. That’s another 1,000 points (or miles) for every $400 ticket you buy. After approximately 7 trips, you’ll have earned enough to purchase that $400 cross country ticket on points. That means you’ve only spent $2,800 instead of $4,000 to earn your 25,000 miles (and that assumes you bought nothing other than airline tickets with that card)!

You don’t have to be as anal as me in dissecting every points program to death (although it can be great fun in the wee hours of the morning), but the “point” is that several companies have great loyalty programs. And if you stack your points between programs, you’ll make out like a veritable bandit. If you’re a frequent user of a particular product or service, make sure you search for a company that offers you something back for doing business with them.

You get the point.

CardTuna

Cash is Dead

The other day, I heard a commercial for the upcoming switch to 100% digital TV in February, 2009. Leading up to the pitch in the advertisement, the voiceover said “Everything’s better in digital, like your music, your pictures, and now even your TV". I found it rather odd that the ad didn’t mention anything about money.

You often hear proponents of the physical greenback making thoughtless statements like “You shouldn’t use credit cards – they’re too dangerous. If you don’t have the cash for it, don’t buy it”. Well, granny, I respectfully disagree.

The electronic currency movement will inevitably give cash its place in the history books and museums, next to the other exhibits of extinction. Aside from the obsessive-compulsive reasons to embrace electronic currency such as not having to handle a bill that 4,563 nose pickers, 67,858 uh “self pleasurers”, and 23,067 restroom non-hand-washers have previously had their hands on, there’s a better reason to ditch the coin, bills and checkbook and fully adopt the world of digital dollars.

The reason is simple – Rewards.

In my last article, I explained that the value of a point was roughly one cent – an almost universal standard across rewards programs. Yes, you can get a better value in many cases and, on the flip side, you can also get short-changed if you don’t choose your credit card account and rewards program wisely. Most rewards programs will give you a point per dollar on everything you spend with your card, and some extra points per dollar for “on-spend” purchases – that is, the brand that markets your card – such as the United Mileage Plus Chase Visa, which offers two points per dollar spent on eligible United Airlines purchases.

So, if credit card companies want to give you money back (again, roughly 1%) for everything you buy using their card product, why wouldn’t you do it? Regardless of how you pay for your purchases, be it cash, debit card or credit card, retailers price in the cost of accepting credit cards into everything they sell. And for a retailer, it ain’t cheap. This cost is called the interchange fee and, depending on the card association (VISA, MasterCard, Discover, American Express), that fee can be roughly anywhere between 2%-4% of the amount charged. Here’s how that fee income gets distributed, using the United Chase VISA I mentioned above, assuming a 2% fee as an example on a $100 purchase at Wal-Mart (disclaimer – The numbers below are for illustrative purposes only. I don’t claim to know anything about the specifics of the VISA/Chase/United contract):

1) VISA collects the $2 and gives the remaining $98 to Wal-Mart.

2) VISA gives the issuing bank (i.e. Chase) their cut. All deals are different, depending on the bank and the complexity/value of the rewards program. Let’s assume Chase collects $1.40 of the $2 that VISA collected.

3) Chase uses the $1.40 to fund the loyalty program – a penny per point – so $1.00 on a $100 purchase. Now, the issuing banks do factor in breakage – a bet that not all points will be redeemed, which means the banks actually spend less than a penny per point. (Breakage is not necessarily a good thing for a bank, as it’s an indication that their loyalty program isn’t resonating with their customers). Chase may pocket the breakage, or their contract with United may require them to share the breakage or pass it all back to United.

4) Out of the $0.40 that remains, a portion – let’s say $0.30 - is passed onto United for use of their brand.

5) The remaining $0.10 is kept by Chase and most likely gets used to fund the marketing of the loyalty program.

There you have it – that’s how roughly 2% of every dollar you spend gets filtered through the system. Every one of us is paying for the rewards programs that exist no matter how you pay for your products or services, whether it’s a stinkin’ pack of gum or a $2,000 replacement transmission.

So, ditch the paper and embrace the plastic. There are a few exceptions, like those contractors who want to charge you a 3% fee for using your credit card, or Uncle Sam who allows you to pay your tax bill on a credit card, again for a 3% fee. Using your card on these types of transactions makes no sense because you’d be spending 3% extra to get your 1% in rewards, so don’t do it. Also, I’d be remiss if I didn’t make any differentiation between debits and credit cards. Debit cards, while practical, do not generally offer rewards, so don’t use them.

Use a rewards credit card for everything you can – even some of your monthly bills can now be charged to a card. Then, at the end of the month, pay off your bill with all of the cash you didn’t spend. You’ll be getting the most for your money, and you’ll be keeping your hands very clean!

Cheers,

CardTuna