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

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

Late payments will imprison or impose capital punishment on your rewards

You already know all the good reasons to pay your credit card bills on time, like maintaining or improving your credit score, avoiding ridiculous rate hikes and late fees, not to mention steering clear of unwanted notices and embarrassing phone calls from collection agencies. But there’s another reason you want to pay your bill on time, and that’s the access to your rewards you’ve earned.

Typically, credit card companies will not only restrict use of your card when your account is in past-due status (which prevents you from earning rewards points, let alone access to your credit line). In addition, your issuer will likely prevent you from redeeming the rewards you’ve already earned!

This ruling is often revealed in your card’s terms and conditions or program disclosures with language like the following examples:

Bank of America’s Worldpoints language: “To participate in the Program, you must (a) maintain a Card that is open and has charging privileges, and (b) be an individual (no corporations, partnerships, or other entities)”

Capital One’s language: “Your account must be open and in good standing in order to redeem, which means it isn't past due, overlimit, fraudulent, restricted, part of a consumer credit counseling program or in a bankruptcy settlement”

Citibank’s language: “To be eligible to earn and redeem [rewards], your [card type] account must be open and current and must not be in default. Citibank may revise or terminate the [card type] [Reward] Program at any time with 30 days prior written notice”

Even though these are your rewards that you’ve rightfully earned over months and years of using their product and paying your bill on time, issuers will invariably lock-up 100% of your rewards bank while your account is in past due status.

Here’s another sneaky catch to watch out for: Some card companies, like Capital One, will even revoke the points you earned in the billing cycle where you made a late payment! Their terms and conditions language is: “If a late fee is charged to your account, you will lose any miles applied to your rewards balance during the billing cycle containing the fee”. So, say you have a big charge like a $2,000 car repair that you throw on your card. Then you pay late that month – all of the points you earned on that charge, and all other charges in the month – they take away from you!

The moral of the story is, if you’re racking up points at a good clip or you’re planning to cash-in your rewards any time soon, make sure you keep your account in good standing (you should be doing this anyway)!

Note that there ARE a few exceptions to this rule. For programs like airline mile and hotel credit cards whereby points accumulated on a monthly basis are subsequently deposited into your airline or hotel loyalty program account, you will be able to access these rewards because they no longer reside with your credit card company.

Unfortunately, and by design, the credit card companies’ Terms & Conditions legal disclosures are less interesting than watching paint dry or grass grow. The reason the language is usually printed in gray 4 point type and includes paragraphs with no less than scores of lines bunched together is because they don’t really want you to read it, but the law says they have to provide those rules to you when you apply for a card.

To understand the various rules of your different credit cards or the cards you’ll apply for in the future, you need to familiarize yourself with this very important language. Hopefully someday, for everyone’s sake, we’ll all have a resource that can provide the “Cliff’s notes” versions in simple, plain English!

Until then, consider your T&C’s a great cure for insomnia.

CardTuna

It's time for your annual checkup!

Just like you go to the doctor each year for a complete physical (you do go, don’t you??), you need to get a pulse on your financial well-being to make sure nothing’s amuck.

Each year, you’re entitled to a completely FREE credit report from each of the three credit bureaus (Experian, Equifax, and Trans Union). And there’s no better time than the new year to check that everything on your credit report is in good order. All you need to do to receive your free credit report is visit www.annualcreditreport.com. This is the ‘real thing’ - There are other sites out there (like www.freecreditreport.com) that are designed to sell you report packages and credit monitoring, and will try to rope you in to paying for something, so make sure you visit the right site, i.e. www.annualcreditreport.com.

When you get your report, carefully check through the list of accounts and make sure you recognize each of them. This can be a tricky process as many of the account listings can look unfamiliar – for example, an instant financing loan that you might have received a card for but never used. The best way is to grab all of your various credit cards, private-label store cards, and loan docs so you can match up your account numbers. If you find an account or other activity like an inquiry that appears suspicious, you can contact the credit bureau that reported the suspicious activity. Links to each of the bureau websites are below:

www.experian.com
www.transunion.com
www.equifax.com

So waste no time and grab your free annual credit report today. It’s usually much more pleasant and less-invasive than visiting your general practitioner!

Cheers,
CardTuna