“Not so fast bucko” (what might be hidden in that rewards credit card)

So, you were able to make all of the purchases that you were looking for this holiday season? Great! It was tough.  You never thought you would find a hoodie with wizard powers, or a full-body poncho so you could bike in the rain – but there they were. (and so cheap!)  Who could blame you for buying an Ewok costume for your dog?  Although we’re not sure why you just HAD to buy yourself a kit to give yourself freckles. (Not that we’d judge anybody’s gifts, but everyone is happy you did not splurge and get the inflatable slide made just for yachts)
No matter what you bought, when January comes around you’re going to be staring at the business end of a credit card bill with your name on it.  If you’re like most of the rest of us you won’t be able to pay the entire balance off when that due-date arrives.  Most Americans have (not one, but) two credit cards with rolling balances in the $5,000 range and an interest rate a little north of 12%.

What if you can’t play credit card bingo?

Credit card bingo (our term) is when – once your balance gets too high – you transfer your credit card balance to a new card that has a zero percent interest rate for an extended period of time (12 months or longer) so that you can save the monthly interest charges while you pay off the balance.  If you have reasonably good credit you’ll get this kind of offer in the mail pretty often.  It’s worth it, even though those deals always come with a “transfer fee” (usually between 3 and 5 percent of the balance you’re trying to transfer).  Once the transfer is made all you care about is avoiding any interest charges while you pay off the balance.  All you have to do is pretend that your interest-free period is one month less than it really is and divide the amount you have to pay back (the transfer amount) by that number to get your monthly payment. (if you transferred $11,000 and the “interest free period” is 12 months – you have to make 11 payments of $1,000 each)

What if you’re credit is not the best it’s ever been?

Not everyone can even get the zero percent offer.  If that’s the case you have a two-part strategy to pay off your credit card bill.

  • Step #1 – love that due date.  No matter what the interest rate on your credit card is, it is lower than the rate will be if you miss a payment and the default interest rate kicks in.  On the day you get your credit card bill, do either of these: 1) pay the minimum amount right away (so you’re sure NOT to miss the due date); or 2) write on the outside of the bill a date that is 7 days BEFORE the due-date on the bill and pay it by that earlier date.
  • Step #2 – Pay extra every month. Find the minimum payment that is listed on the bill.  Then add whatever amount that you can afford to the minimum payment.  After the CCARD Act of 2009,  the way your bill looked was changed big-time.  It used to be that the banks could list a minimum payment that was LESS than the monthly interest charge.  Many folks thought if they paid the monthly payment they would eventually pay off their credit card bill.  Now the bank has to show you how long it would take to pay the balance if you only pay the minimum payment.  What becomes obvious is that you should pay extra if you ever want to pay that card off.  How much extra should you pay?  That’s between you and your checkbook.  In the meantime find the little box that shows how much interest you are paying every month and use that as an incentive to pay as much extra as you can.

Can I get some kind of reward for transferring my balance?

As a matter of fact…..there are many ways for the bank to make money from their credit card business.  They pay less to the merchant than what you were charged (but collect the whole amount from you); they charge those same merchants a separate fee just to process the original charges; they charge separate fees to you and me (annual fee; late fee); and they charge the consumer interest on any unpaid balance from month-to-month.

How much money in the economy do credit cards account for? In 2014 alone, the credit card industry processed nearly $5 Trillion in payments.  Because issuing credit card is such a booming business, companies are always looking for ways to poach more consumers.  One of the weapons that they use is rewards for consumers who use their card.  Reward cards are so popular that now the majority of folks who have a credit card have one that comes with rewards.  Buy stuff with your credit card (or transfer balances in order to open a new account) and rack up the points!

Which one do I pick?

There are plenty of articles that compare rewards credit cards in an effort to let you know which one is the best.  You can get a card that lets you accumulate points, airline miles, cashback rewards or a combination.  Nearly every card gives you points for merely transferring an outstanding balance from your previous card.  Most of them have a hefty annual fee (the good ones are near the hundred dollar mark) that can be waived for the first year (and any year after that if you call and annoy the customer service rep into waiving it).

Of the articles about “how to choose a credit card” that we found, most of them do not talk about the interest rate; one dares to mention how much it will cost to repay cash advances; one dares to mention collections and one actually spells out the default interest rate.  But that’s precious little reality for our tastes.  If you want to do the research yourself we suppose the first thing you need to do is determine how much time you have.  That way you can decide whether to read about the five things to know when you choose a credit card; the 7 things you need to know; the 9 things you need to know or the 11 things you need to know.  Some articles use graphs, most have a picture of the card (which in itself is interesting as a marketing tactic.  One can only guess how much some bank paid for a marketing study that told them it would result in more customers if they put a picture of a piece of plastic in their marketing materials)

This will cost me how much?

The one tidbit that is missing from most of the articles about rewards credit cards is the interest rate.  We can understand why credit card companies don’t include the interest rate on the cards they are peddling.  The whole vibe of their ad campaigns is that after you use their card, you are going to be driving a new (!) car to the airport so you can score some free (!) tickets to fly to Hawaii where you’ll spend two weeks in the new (!) condo you bought, all on free travel points from the shiny rewards card you signed up for.  But what are those points costing you?

No annual fee v. annual fee

This is not the important consideration that it used to be. Nowadays almost every card has an annual fee.

  • Years ago we would think “an annual fee.  Ha! I’ll just get another card”
  • Now, after years of training to desensitize ourselves to the thought that we are paying a fee for a service we would qualify for anyway, we think “Oh, $50 bucks for an annual fee isn’t that bad. What the heck.”

And so it goes, you can razzlefratz and go off in search of a card that doesn’t have an annual fee, but you’ll be looking for a while.  A great many cards dangle the “no annual fee” idea in their ads. But, they’re really just talking about the first year.  Many of those cards also waive the annual fee if you have the wherewithal to ask.

Our advice: look for a card with no annual fee. Then be prepared to call just before the second year begins and ask if they would waive that fee on a go-forward basis.

Rewards points

You can obtain rewards points in various ways.  Every card gives out points as a function of how much money you spend.  Most will award points for every dollar that you transfer from a competing card when you open your new account.  Comparing them will take some time.  You’ll probably be better off if you make a chart to figure out which one will actually be the most financially beneficial.  Card A might give you more points for each dollar you spend; but less for each dollar you transfer.  Card B might give you more points for transfer dollars, but only if you’ve spent a lot in the 6 months immediately prior to your transfer.  (of course the premise here is that you actually look at several offers and compare them to each other)

You should also factor in this equation what type of rewards you’re looking for.  You can choose to get cash back, airline/travel miles, gasoline, groceries or (as is becoming more popular) a card that lets you spend your rewards for any product you would like.  There is another factor that will not fit into your comparison chart so easily:

How easy will it be to redeem your rewards?

  • Are you signing up for airline miles?  If so, you need to figure out what kind of restrictions the card will put on you when you want to buy a ticket.  Does the card let you travel only on Thursdays at 5:00 a.m.?  Does it require you to stay 10 days wherever you’re going? Will it let you book flights on any website and not just the airline’s own website?
  • Are there restrictions on dates or types of purchases when rewarding miles?  You need to figure out if the card that boasts “earn 50 miles for every purchase” stops awarding you points for every purchase that you make between Thanksgiving and New Years’ Eve; or if you don’t get points for every purchase for an item that you can wear.
  • If the card gives you points to be used to buy gas, it’s important to see if you’re limited to buying gas from a company that only has stations in Wakaluk, Alaska; or if the procedure for redeeming is so convoluted that you can’t figure it out.
  • The rules for redeeming any points are going to be covered in the Terms & Conditions that the new card has on the web.  It’s not a bad idea to take a pass at the Terms to see what the rules are for redeeming the points.  But don’t let your investigation end there.  Common problems that arise for folks who have tried to redeem their points for that same credit card might not be so easy to predict if all you do is read those terms.
  • Cash-back rewards is the most straight-forward to redeem.  Cash might not sound so flashy, if you’re comparing them to flying around the world for free.  But, “wait for a check to arrive” is probably the simplest redemption procedure you’ll come across.

Our advice: Look at the Terms & Conditions to shed light on the redemption procedure.  Then, try Googling: [name of card] and trouble redeeming rewards points, or [airline miles; grocery points; gasoline points, etc] to get an idea how much you can actually count on receiving those sweet rewards.

However easy it is to redeem the points, your most important inquiry is about the

Interest rate

Most of us have a revolving balance on our credit card.  Which means that every month, we are paying interest on the balance due.  Our hope is to one day pay that balance off and get back to the pledge we made back when we got married (“We are gonna pay the entire balance on our credit card every month!”).  But, until that lottery ticket finally has winning numbers (or until we stop using our credit card for about a year or so) we’re stuck paying interest.

  • Intro rate v. regular rate – Every credit card offer shows you what the interest rate will be.  They also have an asterisk next to that number, because the interest rate will change at some point in the future.  Your questions are: WHEN will the interest rate change and HOW HIGH will it go.  If you get a card because the interest rate is 2.2% and don’t mark the date it will shoot up to 19.9% on your calendar with big letters and a skull & crossbones logo, you’ll be disappointed.
  • Variable or fixed – variable rates are still alive & well in credit card world.  If your new card has a variable interest rate, you don’t need to worry so much about how they will calculate your interest rate.  What you have to worry about is that the interest rate is NOT Fixed.  This worry should be enough to make you think about looking elsewhere for you rewards.
  • When you don’t care about the interest rate – If your company is paying the balance on your credit card you’re not so worried about the interest rate (unless the talk around the office is that accounting is famous for not reimbursing for credit card charges for 90 days) Otherwise, don’t sweat it.

This one’s the whole ballgame.  Whatever you do in terms of research, if you can figure out nothing else about that new credit card you have to know what the interest rate is.  There is no quicker way to find yourself in the soup than thinking that your new card has a 5.5% interest rate when the rate is really 15.5%.

Editor’s example of what in-the-soup looks like:

If your monthly balance is $10,000; with a 5.5% interest rate your monthly interest charge will be: $46.00.

If your monthly balance is $10,000; with a 15.5% interest rate, your monthly interest charge will be: $129.00.

If you want to see how nasty interest charges can get and how your monthly payment can be too much to deal with at different balance amounts, click here for a table of sample monthly interest amounts.

So, transfer those balances to a fancy-schmancy rewards card and charge up a storm.  Just make sure that you’re not making it worse for yourself in the process.

Posted by: Mark Wiseman (who also pledged early in his marriage to sell his house, move away for a year, and then move back…..don’t ask)