Archive for the 'Credit Cards' Category
I keep seeing the American Express Blue Cash card winning “Best Best Cash-Rebate Card” from financial magazines like Kiplinger’s Personal Finance. A few people have asked about it, so here’s my quick review. What does “up to 5% cash back” really mean anyhow? Let’s dig up the fine print on the bottom of the application:
^”Everyday Purchases” are Eligible Purchases made at U.S. supermarkets, gas stations and drugstores, in each case that are not departments of superstores or warehouse clubs.
Until you spend at least $6,500 total on the card, you receive 1% on grocery/gas/drugstore purchases, and 0.5% on everything else. After you reach that point, you start earning the full 5% on grocery/gas/drugs and 1.5% on everything else. Your first $6,500 in spending is not retroactively boosted, only the amount over that threshold gets the 5%/1.5% rate.
5%/1.5% is pretty solid, but you have to first absorb that initial hit in the beginning. $6,500 a year is $540 a month, so if you don’t spend more than that each month then you’ll never even reach the happy tier. If you do charge more, the question then becomes - what is your actual average cashback percentage when everything is taken into account? I ran the numbers and here is the graph:
I kept things simple by keeping each category isolated from the other, so the 5% for “everyday” purchases only kicks in after $6,500 in “everyday” purchases. This isn’t a good approximation for most people, because in reality, the $6,500 limit will be hit by a combination of both “everyday” and “all else” purchases, so your actual cashback return for groceries and such should rise much earlier than shown in the graph. Once it does kick in, you get to 3%+ cash back in that category pretty quickly.
The “all other” graph rises much more gradually. In this category, you’ll need around $2,000 per month in spending to achieve an overall 1.25% back. $5,000 per month will get you to 1.4% overall back.
Quick Conclusions
If you (1) charge at least $1,000 per month regularly with the occasional spike for one-time purchases, (2) prefer simplicity and only want to use one card for all your expenses, and (3) don’t ever carry a balance or pay credit card interest, then I can agree that this is a pretty good card. The more you usually spend, the better your rewards percentage. (Obviously, don’t spend more just to get a few % back.) Most people who own this card report to me that they are pretty happy with it.
In addition, if you spend a lot on gas/groceries/drugstores and have enough total purchases to get past the $6,500 marker early in the year, you can do quite well with this card. But if you are a light spender, you will probably be better off with a card with no tiers.
Posted in Credit Cards, General | 27 Comments »
The big McMansion picture in my last post reminded me that I had to finish watching Maxed Out, a film about the credit card industry. You can watch it for free (albeit in low quality) on Google Video [90 minutes long]. The very first scene includes a real estate agent selling homes with crazy stuff like elevators, two dishwashers, and wine caves.
My Twisted Review
The purpose of the film was to “raise awareness of how credit and lending issues are affecting society.” I think this is a admirable purpose. However, as someone who is familiar with credit card companies and all their practices, my primary thought on this film was “duh”. Please watch out for large amounts of sarcasm and cynicism ahead.
Gasp! Credit card companies target the stupid, the poor, the rich, and everyone in between. They charge huge fees and enormous interest rates if you pay late. They will even offer credit to those who just filed bankruptcy recently, because they know (1) they can’t file bankruptcy again for several years and (2) they are already shown an inability to handle their spending. You could be dead or fictional and still be receiving card applications in the mail.
However, too often in the movie I heard phrases like “Yeah, I did sign it without reading…” or “I figured if they offered me money, it meant I could handle it” or “I never talked my kids about credit cards before sending them off to college” or “I know, I know, I should have read the fine print”. Don’t make it so easy for them, please…
Read the rest of this entry…
Posted in Credit Cards | 50 Comments »
Yes, there’s AnnualCreditReport.com for free credit reports. But what about your credit score? I’ve mentioned a couple of these before, but here is a compilation of five different ways to grab that credit score for free without the hassle of annoying trial offers. I repeat: No free trials, no credit card number required, nothing to cancel.
Washington Mutual Credit Card
Formerly Providian, WaMu credit cards will show your your FICO score free of charge when you log into your account. It is based on your Transunion credit report, and is updated once a month. I believe is is for all of their credit cards, but I may be mistaken. The catch is that if you don’t already have a credit card with them, you’ll have to apply for one which will ding your credit score - something that’s worth $100 or more to me!
Prosper Person-to-Person Lending
Prosper Lending provides a free credit grade for prospective borrowers, based on your Experian credit data. Details here. Also of note is the $25 bonus for new members once a loan is funded as either a borrower or lender.
LendingClub Person-to-Person Lending
Similar to Prosper, if you start an application to become a borrower at LendingClub they will check your credit on your behalf to find out what rate they will charge you. Instead of a numerical score, you will get a grade like “A2″ or “B3″. Then you can use this key to determine your FICO range. For example, A2 would indicate a score range of 747-769. It is also based on your Transunion credit report.
You’ll also be able to find out what kind of interest rate you might get on a personal, unsecured loan. This is based strongly on your FICO score, but is also adjusted due other factors like employment status. If this is less than what you can currently get on your existing debt, you might consider consolidating your debt at LendingClub. Otherwise, it can just satisfy your curiosity. New lenders and borrowers can earn a $25 bonus for joining by using this referral link (not just the home page).
(Note: If you are currently a lender, you must set up a separate account (new e-mail address) to become a borrower. This is not unethical or “getting around their system”, I asked and this is simply how their system is set up right now.)
E-Loan Mortgage
Supposedly this is to help you shop for mortgage rates, but E-Loan also sells a variety of credit score products as well. See this link at E-Loan and scroll to the bottom for Free Credit Score (Credit Score Only) which doesn’t require any trials. It not a FICO-brand score, but is the CreditXpert score and is based on your Experian credit bureau information. But keep in mind this is good for one-time only, so you might want to save it for later.
CreditKarma
Currently based on your TransUnion data, CreditKarma offers a daily look at your credit score. The catch is that it’s not a FICO or any other major brand of score (at least that is known), but with this service you can track changes from month-to-month. Details here.
You will need to provide your personal information and Social Security number to these companies, naturally, so be comfortable with that. Unless otherwise noted, none of these methods by themselves will affect your credit score as you are requesting them for yourself. However, if you do take out a loan or take some other additional action, a hard inquiry which will affect your score may result.
Posted in Credit Cards | 32 Comments »
Back in February, I received a mailing about a class-action lawsuit claiming that Visa, MasterCard, their member banks, and Diners Club conspired to set and conceal markups and fees, typically of 1-3%, on foreign transactions. It appears that the settlement amounts have been agreed upon. Here are some selected excerpts from the official settlement website and FAQ.
Am I a member of the settlement class?
Those persons who made a foreign transaction using a Visa-, MasterCard-, or Diners Club- branded credit, charge or debit/ATM card between February 1, 1996 and November 8, 2006 are members of the Settlement Damages Class.
How do I complete the claim form?
You need to complete and submit a claim form prior to the deadline, either on-line at www.ccfsettlement.com/claim, or by mailing or faxing in the form.
Option 1 is an Easy Refund of $25 and is recommended if you travel outside of the U.S. for less than one week or had foreign transactions of less than $2,500 using your eligible cards during the class period.
Option 2 is a Total Estimation Refund that is based on typical spending during travel and answers to the few questions listed on the claim form. This option is recommended if you traveled outside the U. S. for more than one week or had foreign transactions of more than $2,500.
Option 3 is the Annual Estimated Refund option. It is recommended if you had extensive foreign travel or foreign transactions and are willing to provide year-by-year information.
Seems like a pretty huge settlement class! You don’t even need to have gone anywhere, maybe you just bought something online in a foreign currency. If you choose the simple $25 option, you will need to provide your name, address, credit card number, issuing bank, and the last 4 digits of your Social Security number. This site has been reported in various new outlets, so I believe it to be legitimate. Also, thanks to the readers who reminded me about this.
Posted in Credit Cards | 45 Comments »
American Express is running a variety of promotions for their different credit cards right now. Use them wisely!
American Express Starwood Card - Up To 50,000 Frequent Flier Miles
To start off, the American Express Starwood Preferred Guest Card is currently giving out 10,000 Starwood points for signing up and making any purchase. You earn 1 Starwood point per $1 spent on the card. Finally, the current promotion also gives you an additional 15,000 Starpoints when you spend $15,000 in 6 months. That can be high for some folks, but if you prepay your property tax, car insurance premiums, tuition, whatever you might get there.
Why? 10,000 sign-up bonus + 15,000 normal points from spending + 15,000 points from spending bonus = 40,000 Starpoints = 50,000 frequent flier miles on a bunch of different airlines, which is two free domestic roundtrip tickets! Alternatively, every 9,500 Starpoints can be converted to $100 in Amazon.com gift certificates or other stores like Banana Republic.
I’ve written before about the many uses of this Starwood Card. My favorite use remains as a mix of a hotel and miles card. I convert the points as needed to “top-off” the rest of my airlines miles. The rest goes to cheap rooms. I am actually trying book some free rooms right now for February which should give me a value of 4 cents per point ($125/night room for 3,000 points). If you consider that a 1% back card is the same as 1 cent per point, this is like getting 4% back. You also automatically get Gold Starwood status with this card, which has gotten me several free room upgrades. The first year is free, and after that the annual fee is $45.
AmEx Starwood Business Card - 10,000 Starpoints, 25% Bonus
For new sign-ups, the AmEx Starwood Business Card is also offering 10,000 free points after first purchase. For current cardholders, you may be eligible for 25% more points in November, for a total of 1.25 points per $1 spent, or up to 1.56 miles per $1 spent (1.25 x 1.25).
Enroll now and use your Starwood Preferred Guest? Business Credit Card to earn 25% bonus Starpoints? on all your eligible purchases from November 1 to November 30, 2007. For additional information see the terms and conditions below.
Read the rest of this entry…
Posted in Credit Cards, Deals & Offers | 20 Comments »
The Holiday SeasonTM seems to start earlier every year. Discover Card has already announced their 2007 Holiday Mall Promotion, which essentially give you $20 back for every $200 that you spend at limited mall locations:
Head to one of over 160 participating shopping centers from November 1 - December 31, 2007, and you’ll get a $20 Discover Gift Card for every $200 you spend on your Discover Card*. Just take $200 in Discover Card receipts from any store(s) at a participating mall or shopping center to Customer Service (or the Discover Card Booth) and redeem them for a $20 Discover Gift Card.
The fine print version:
*Get a $20 Discover Gift Card for every $200 in purchases made with your Discover Card at a participating shopping center between 11/1/2007-12/31/2007, while supplies last. Original receipts must be presented to a participating shopping center’s Customer Service Desk (or the Discover Card Booth) by 12/31/07. Limit five Gift Cards per account during the promotion period. See Gift Card terms and conditions for full details.
Doing the math, you can up to 10% back this way if you manage to spend an exact multiple of $200, with a maximum of 5 gift cards ($100) for $1,000 in total spending per Discover card account. Not too shabby if you’re gonna spend that much anyways.
But during last year’s promotion, a reader happened upon a loophole: If you return your purchase, there is no requirement to return the gift cards (and still isn’t one this year). Maybe you found something cheaper elsewhere, maybe you just decided against buying yet another iPod. Now, you may have some ethical problems with taking advantage of this loophole. In that case, you can try to hand them back to the Customer Service clerk. But be careful, because if you end buying stuff again later, you might not be able get that $20 gift card back again since they don’t have any official mechanism to return the gift cards. Found via Fatwallet.
This would go nicely with the Discover More card which offers a $40 bonus after spending $500, or the Discover Miles card which offers 12,000 Miles (worth a $50 gift card + $25 cash) for making one purchase a month for a year. Both also offer 0% APR balance transfers.
Posted in Credit Cards, Deals & Offers | 23 Comments »
I ran across this article Best credit cards for college kids on CNN Money. I found it interesting that 75% of all college students have a credit card, when I see so much media attention to how credit card companies target students. Seems like students now are seen more as big kids instead of young adults (again, note the title of the article). Soon they’ll need lessons on how to feed and bathe themselves…
The article then goes on to list some good characteristics of a college credit card, which really didn’t seem any different than what anyone should look for in a credit card… Low APR? Less fees? Calling Captain Obvious! CNN did suggest out the best credit card for those select “responsible” students - the Citi mtvU Platinum Select Visa card, which was interesting.
The goal of every rewards card is to give you just enough good stuff to have you use it for everything, and this card is smart. What were my two top expenses as a college student besides rent? Eating out and textbooks. So guess what, the card gives you 5 ThankYou Points for every dollar you spend at restaurants, bookstores, record stores, movie theaters and video rental stores. These points can be converted to up to 5% back in gift cards or 5% back in cash towards your student loans. Some may see this as sneaky way to prey on college “kids”, but I see it as another loss leader to take advantage of.
In addition, one big “loophole” is that everything you buy from Amazon.com gets 5% back as well, as it is categorized as a bookstore! They can’t tell if you bought books there, or went for 8 bags of groceries
and an iPod Touch instead.
The only problem is that if you aren’t a student, some people report that they ask for verification. Some have gotten transcript requests, many others slip by. I know some people out there have this card; please report your experiences! Students can also earn 250-2000 points per semester for maintaining a good GPA, and 25 points each month for not exceeding your credit limit and paying on time.
Posted in Credit Cards, Deals & Offers | 30 Comments »
The Discover More Card has been on my list of top 0% APR offers for a while now, but I haven’t really written much about it as it’s always been around #3 or #4. But a reader just pointed out to me that it is now offering a $40 bonus if you spend $500 within the first 3 months, so I decided to take a second look. As it turns out, if you take full advantage of all its features it can be one of the more profitable cards now.
0% APR for 12 months for both purchases and balance transfers
Of course, the 0% APR on balance transfers for 12 months can be great for making free money, and this feature can be worth hundreds of dollars depending on credit limit. But there is a pesky balance transfer fee of up to $75. However, the $40 bonus counteracts part of that (and you can actually make the required purchases at the same time as having balance transfers since both are at 0%). So now we’re down to about a $35 deficit.
5% Cashback Bonus “Get More” Program
As an overall cashback rewards card, this card is actually subpar. You need to reach total annual purchases of $3,000 just to get to the standard 1% cashback tier… yawn. What you have to do is take specific advantage of is the 5% cashback on certain broad categories that change each quarter - like travel, home improvement, gas, and restaurants. Here are the categories they had this year:
So right now, I would put all my usual Restaurant charges on this card (and only restaurant charges if I can get to $500). If the next quarter is Travel, then I would put all airfare charges on the card. If you manage to just spend $700 in these areas over the course of an entire year, you’d get $35 back and essentially make back your balance transfer fee completely. Anything over that and you’ll actually be ahead of the other 0% APR cards available right now! There is no annual fee, so even after the 0% period is over you can keep this card around for the 5% back in specific areas.
Finally, you can either redeem your rewards for straight cash, or you can “double your reward” by redeeming it for gift cards from selected partners. For example instead of $20 cash you could get a $40 gift card for Romano?s Macaroni Grill. The stores aren’t the best (no Target or Home Depot), but that’s probably why they can be so generous. I still like cash, myself.
There is also the Discover More Sealife Collection Card, which has the exact same features thing but you can get a clownfish or turtle on your card. 
Posted in Credit Cards, Deals & Offers | 23 Comments »
Chase has added a new twist to their Chase Freedom Cash Visa Card. Before, it simply offered 3% cash back on the first $600 in monthly purchases made at grocery stores, gas stations, and ?quick service restaurants?, and 1% on everything else. Now, it adds more flexibility and offers 3% cash back on whatever your “Top 3 Everyday Spending Categories” are, and they can change each month. Here are the 15 available categories:
- grocery stores (no superstores or warehouse clubs)
- gas & convenience stores
- quick service payment/fast food restaurants
- telecommunications
- cable/satellite TV/Internet service providers
- video rentals
- department stores
- dry cleaners
- drugstores
- movie theatres
- commuting costs (including ferries, bridges, tolls, parking garages, taxis/limos)
- pet supply stores and veterinary services
- utilities
- beauty shops (salons and spas)
- gym/recreation memberships
You can get your rewards in points or cash (1 point = $0.01), but the points don’t really seem like a great deal (10,000 pts = $100 gift card). I’d stick with cash, because if you wait and redeem $200 at once, you will actually get a $50 bonus, for a total of $250. This makes the 3% top spending/1% everything else cash back turn into 3.75%/1.25% cash back. Taken alone, this makes the card look pretty good if you’re the type that likes to keep it simple and have just one rewards card for all your purchases.
Posted in Credit Cards, Deals & Offers | 42 Comments »
There is yet another rewards card variation out there - the Citibank CashReturns MasterCard.
What’s special about this card is the promotional offer. It offers 5% back on all purchases for 3 months. (Update: as of 4/20, it only offers a 20% bonus on the standard 1% back on everything), with no caps or limits. This would be ideal for those that either regularly charge high amounts on their cards, or have any large purchases coming up. Got a home improvement project approaching? Christmas gifts? Vacation plans? Reimbursed work expenses? I know we really racked up the charges when we moved.
Doing the math, this has the potential to be better than any of the other sign-up bonuses out there. If you get 5% back on $10,000 during the intro period, that’s $500 of tax-free cash in your pocket! (Why credit card rebates are believed to be non-taxable).
The standard benefits are pretty average, but do offer more towards simplicity:
» Earn 1% cash back on all purchases
» No limits or expirations on the amount of cash back earned
» Checks sent automatically upon earning $50
» No Annual Fee
Update: Yes, there is also 0% APR on balance transfers for up to 12 months with this card, but note that it comes with a transaction fee of 3.0% of the amount of each balance transfer ($5 minimum). If this is what interest you, see this list for alternative cards with no initial balance transfer fees.
Posted in Credit Cards, Deals & Offers | 61 Comments »
I got three e-mails with this same question yesterday! Mostly, people want to either participate in balance transfer arbitrage or grab a few new rewards cards.
To start off, we must realize that all credit scores are based on secret formulas, supposedly generated by supercomputers and mountains of data to accurately predict our creditworthiness. This results in companies like FICO never truly revealing the ingredients to the secret sauce, otherwise we could just do it ourselves and they’d have nothing to sell.
In other words, nobody truly knows the answer. Now, I have never read anything official that specifically listed “number of credit cards” as a negative factor in scoring. We can only examine what they have revealed and try to read between the lines. For example, FICO has previously released this breakdown:
Some of these aren’t related at all to the number of credit cards you have, such as “on-time payments” and “mix of credit used”.
Capacity used - This simply means how much of your available credit you are using, sometimes referred to as utilization ratio. If you’re maxed out on all your cards, obviously that’s not a good sign. If anything, having more credit cards would mean more available credit would lower this your utilization ratio and be a good thing. Now, individual creditors might balk at someone having too much available credit, but it doesn’t appear to factor into the FICO score.
Length of credit history and past credit applications - To be specific, not the only length of your oldest line, but also the average age of all your accounts matters. Continuously opening new credit lines will hurt your credit score. At the same time, having a lot of old cards can “anchor” your average account age as well. For example, if I already have 20 cards averaging 7 years old, adding another new credit card won’t make that average budge hardly at all. Again, we see that if anything, having a lot of cards might actually be helpful. (This is why I also don’t cancel credit cards unless it’s profitable to do so.) However, opening a bunch of cards all at once is also an indicator of desperation, so I limit myself to about 3-5 credit cards per rolling 6-month period (for profit and more profit).
Another source of information is the FICO Score Estimator from myFICO. Here, how many credit cards you have is the first question asked! Uh-oh. But again, I think the first two questions mainly help determine your average account age. It’s also a filter as you need at least one card that is 6 months old for the estimator to work. If you look at all 10 questions you’ll see many parallels with the pie chart factors.
Finally, there is personal experience. I have over 20 credit cards (average is ~10 per consumer) and have seen no indication that having too many credit cards makes my score any lower. When not in 0% debt, my score is excellent. Therefore, if you ask me, having too many credit cards may give people too much temptation or too much clutter, but based on the evidence available I don’t believe that having too many cards by itself lowers one’s credit scores.
Posted in Credit Cards | 58 Comments »
My series of articles on How To Make “Free” Money From 0% APR Balance Transfers has been very popular and many readers have also jumped in. Despite the risks, I’m still happily earning some money from the credit card companies for a change, and haven’t missed any payments. From the beginning, people have asked me to make a spreadsheet or calculator in order to estimate the potential profit from such endeavors. I initially decided against doing so because there are lots of different variables at stake that make an exact prediction close to impossible. However, I think it may still be useful to obtain some more realistic numbers.
Without further ado, I present to you the…
0% Balance Transfer Profit Calculator
Inputs and Definitions
- Arbitraged Interest Rate (APY) - Where are you putting the money you’re borrowing for free? This is the interest rate of the investment vehicle (savings account, CD, Treasury bond) you are using, or perhaps the interest rate of the existing loan (car, home equity, student) that you are paying down.
- Starting Balance (dollars) - How much money are you transferring?
- Monthly Minimum Payment (%) - Usually you must still make a monthly minimum payment on the outstanding balance during the 0% period, which will decrease your profit potential slightly. This is usually around 2%, but may vary between 1.5% and 4%.
Assumptions
- The balance transfer is for 12 months at 0% APR, with no balance transfer fee. You can find my list of the best 0% APR offers here with low or no balance transfer fees here.
- The interest is assumed to compound monthly, which allows me to convert from APY to APR, and then to a periodic rate. Compounding frequency is a variable here, but doesn’t change the numbers too much.
- I am ignoring the time required to actually convert the balance transfer into cash earning interest. Sometimes this can take up to a few weeks, sometimes it is much faster. Instead of guessing, I just leave it be.
- I am also ignoring things like grace periods and the timing of statement cycles and due dates, which can actually increase the time that your borrowed money is earning interest, and thus your profit.
- If you are earning interest in a taxable bank account, you will likely owe income tax on that interest at your marginal rate. This is not accounted for in the calculator, but is a simple calculation.
(If you’re confused about what I am talking about, please refer to the tutorial mentioned above.)
Example Profit Calculation
Let’s say you obtain $15,000 and place it in a bank account paying 5.25% APY, with a 2% monthly payment. Using our assumptions, the 5.25% APY is equivalent to 5.13% APR, or earning 0.4273% of the balance each month.
Beginning of Month #1: You have $15,000 in the bank. Total balance left on credit card: $15,000. Nothing is due yet.
End of Month #1: You earn $64.10 in interest, but also need to pay back $300 (2% of $15,000) out of your bank balance for the minimum payment.
Beginning of Month #2: Total in bank:$14,764.10. Total balance left on credit card: $14,700.
End of Month #2: You earn $63.09 in interest, but also need to pay back $294 (2% of 14,700).
This continues for 12 months, as shown below:
At the end of the 12th month, your bank balance is $12,477.87, and you still owe $11,770.75 on the card. You pay it off completely, leaving you with the resulting estimated profit of $707.12.
Play around with the calculator. Some people actually have over $100,000 out at once, earning them thousands of dollars a year. My credit limits aren’t quite that high…. yet!
Posted in Credit Cards, Deals & Offers, Tools & Calculators | 65 Comments »
I’ve gotten a few variations of this question recently:
I’ve only got about $5,000 in savings and about $4,000 in credit card debt. I’m not sure if I should pay off my cards first before I decide to invest or what. I’m just looking for a way to make my money work harder. - Michael, New Investor
I indirectly addressed this topic in my post titled You Have Some Money. Where Do You Put It?, where the my top 4 were listed as:
- Invest in your 401(k), if you have one, up until the match.
- Pay down your high-interest credit card debt.
- Create an emergency fund with at least 2 months.
- Fully fund your Roth IRA.
If you read through the many thoughtful follow-up comments, you’ll see that many people have differing views on this. I’ll try to clarify my own positions here, but although I will try to provide good reasons behind then, I do agree that this is all very subjective. As usual, the ultimate goal is to present all the arguments in order to help everyone better determine their own personal solution.
#1 Invest in your 401(k), if you have one, up until the match.
Many employers offer matching 401(k) contributions. So if you contribute $100 from your paycheck, your employer will also chip in $50-$100. This is an instant 50-100% return… Some would even call this free money! Unless your credit card interest rates are over 50%, mathematically you are ahead by far. In addition, you have now started your nest egg for retirement.
Exception: The benefit of this match gets a little hazy as often you have to work for a number of years before the matched amount “vests”, or officially becomes yours. You may never actually get to keep much of the match if you only work for a year or two, so take your long-term prospects into account.
#2 Pay down your high-interest credit card debt.
Here we reach one critical debate: Paying Down Debt vs. Roth IRA. On one side, we have high interest (say, over 8% right now) debt. On the other, we have the opportunity for tax-free growth.
My argument here is, again, simple math. If on one hand you have money in stocks growing (maybe) at 10% tax-free, and on the other hand you have money shrinking at 18% with no tax deductions, you’re still losing money! Therefore, I feel the best general decision is put all that money towards your debt. Yes, saving now may mean much larger balances later, but remember, here you are choosing one or the other here, and not paying off the credit cards puts you behind.
The counterargument to this is that you only get to put in $4,000 in a Roth every year and that is precious. You can’t put nothing in this year and $8,000 next year. If you are sure that your tax rate to be higher in retirement than now, and you don’t expect to have access to other similar options like a Roth 401(k) or 403(b) in the future, then I can see how putting money towards the Roth may be better.
(Now that I think of it, another reason might be that Roth IRAs are protected in case you decide to wipe out all your credit card debt in bankruptcy court…)
Exception: One should always try to lower their interest rates if possible by calling the credit card issuers directly or, if your credit is high enough, try to get a low interest balance transfer onto another card.
#3 Create an emergency fund with at least 2 months.
Here is another hard question: Where does an emergency fund play into all of this? Overall, I think people should pay down their high-interest debts as much as possible before saving up 6-12 months of emergency funds.
Why? For one thing, if an emergency does occur, many expenses can be simply be put back onto those same credit cards: utilities, food, clothing, medical bills, etc. Other things like rent can be paid via cash advance. Since it’s most likely an emergency won’t occur, you’ll be saving a lot of interest by paying off the high-interest debt now.
The reason I put 2 months down is because I wanted to designate this a “barebones” emergency fund. The actual amount needed depends heavily on the individual: How stable is your job? Do you have disability insurance? Would your parents or someone else bail you out?
Fully fund your Roth IRA.
Although you can withdraw your contributions out of a Roth if you need to, the Roth should be a last resort. Therefore, you have the “barebones” emergency fund first, and then the Roth IRA. Should a Roth be above even a barebones emergency fund? That’s a judgment call. In my mind, a barebones emergency fund is maybe $2,000. Otherwise, you’re literally living paycheck-to-paycheck, during which I would worry about now first before the future and Roth IRAs.
Exceptions: As noted earlier, the Roth IRA is really only better than a Traditional IRA or 401k if you expect your marginal tax rate to be higher in retirement than when you make your contributions. If you expect them to be the same, they are essentially equal, with the Roth taking perhaps a slight edge. Here’s the math showing why… Say you have $10,000 pre-tax income to contribute, 25% marginal income tax rate both now and in retirement, 8% annual return, and a 30 year horizon.
401k (pay tax later):
( 10,000 x 1.08^30 ) [compounding] x ( 1 - .25%[tax later] ) = $75,469
Roth (pay tax now):
( 10,000 x ( 1 - .25%[tax now] ) )x (1.08^30) [compounding] = $75,469
If your tax now > tax later, the 401k comes out ahead. If tax now < tax later, the Roth wins.
Please share your thoughts in the comments, if I haven’t confused you completely already…
Posted in Credit Cards, Investing | 48 Comments »
(Update: the 25,000 mile offer is now expired) 
I finally got around to opening some mail today and saw that my American Express Gold Business card arrived. I had almost forgotten I had applied for it in the whole move. (I convinced my wife to apply as we could really use the 25,000 Membership Reward sign-up bonus as frequent flier miles.)
As has been reported by other readers, the paperwork that came with it only mentions a bonus of 5,000 points after the first purchase and another 20,000 after spending $50,000. I really wanted to get to the bottom of this, so I called American Express and talked with multiple reps about the bonus. I explained to them that the wording is very clear, I have the specific bonus code, and is the offer still up after more than two weeks, so it is clearly not some unintentional misprint:
Upon the Basic Cardmember’s first purchase, a one time bonus of 25,000 points can be earned toward the Basic Business Gold Rewards Cardmember’s Membership Rewards? account and may appear as separate credits of 5,000 and 20,000 bonus points.
Most of the reps seemed like robots and just sounded confused as this wasn’t on one of their scripts, so I just ended the call quickly in that case. But two of them were familiar with this promotion, and said that they had already fielded several calls about it. The summary:
1. The same paperwork goes out to everybody, and what is mentioned is the standard, older promotion. This doesn’t mean you won’t get the 25,000 points, as this special promotion does exist and is valid.
2. The problem is that they can’t tell on their computers which promotion you signed up for. However, it should be tracked in their systems internally if you used the right link. I would keep a print-out of your page. If you want, you can call them and ask them to note specifically the Bonus ID 2329 on your account, which may help you dispute if anything does happen later.
4. Otherwise, there is really nothing you can do right now. Personally, I am confident that they will come through, as I have already scored $100 + 5,000 miles from the same card last year, and in that case nothing about any bonus was mentioned in the paperwork that came with the card! I’m just going to make my first purchase quickly, tuck it away, and wait the 6-8 weeks.
Posted in Credit Cards, Deals & Offers | 25 Comments »
Reader Trent recently asked me about a site called LifeLock, which offers identity theft protection services for $10 a month. I figured that it was the same old credit monitoring deal that lots of site offer, but in fact it’s even less. The site openly admits that most of what they offer can be done at no cost, but also (understandably) leaves out the details on how to do it. Here they are with those details stuck back in, as ironically their site turns out to be a great guide on how to easily help prevent your identity from being stolen for free!
First, we ask the credit bureaus to set fraud alerts on your behalf. Usually, this is done through our automated systems and the alerts are set within an hour. From time to time there may be a hitch and we have to do the first one manually, usually because they have a different address on file for you. If this happens, we?ll tell you right away and do what needs to be done to get the alerts set.
Free - Just call the numbers below. Technically, alerting any single bureau should automatically initiate fraud alerts on all of them, but it may be more reliable to simply call each one separately.
* Equifax: 800-685-1111; Fraud Dept. 800-525-6285
* Experian: 888-397-3742 (same for Fraud Dept.)
* Trans Union: 800-916-8800; Fraud Dept. 800-680-7289
I should note that this will also hinder your ability to get quick approvals for things like auto loans or credit card applications. One good tip is to use your cell phone as the contact number so that the bureaus can quickly verify your identity when you really do want to apply for credit.
Second, unless your circumstances change and you tell us not to, every 90 days or so we ask the credit bureaus to do it again.
Free - Use Google Calendar (also free) to e-mail you a reminder to call again in 90 days. Rinse and repeat.
Third, we request that your name be removed from pre-approved credit card and junk mail lists and we keep making the requests as they expire. Statistics show that this is one of the most common ways that thieves hijack identities. Plus, all that mail is just so irritating. Many of our clients tell us that this alone is worth the price.
Free - Just go to OptOutPrescreen.com to get removed for 5 years. I’m probably in the minority here, but I kind of like getting pre-approved offers myself, it helps me track trends in interest rates, special offers, and gives me an idea of how good my credit score is.
Fourth, we order your free credit reports on your behalf from the major credit bureaus and they are sent directly to you. We do this every year.
Free - Yet another feature that is free to all by the Fair Credit Reporting Act, and can be found at AnnualCreditReport.com. In fact, here are 4 more ways to get a free credit report. One of them is simply placing a fraud alert as described about. If you keep setting one up every 90 days, you can technically get a total of 15 free reports every year (3 credit bureaus x 5 each).
Last, but certainly not least: If your Identity is stolen while you are our client, we?re going to do whatever it takes to recover your good name. If you need lawyers, we?re going to hire the best we can find. If you need investigators, accountants, case managers, whatever, they?re yours. If you lose money as a result of the theft, we?re going to give it back to you. We will do whatever it takes to help you recover your good name and we will spend up to $1,000,000 to do it.
Not free. But, you can get lower levels of identity theft protection for free at various financial institutions like your local credit union or at many major banks, just for having an account with them. For example, Washington Mutual offers $5,000 of Identity Theft insurance with no deductible, as well as a phone hotline to “Identity Theft Recovery Specialists”, if you have a free checking account with them.
So, is the convenience of LifeLock, as well their $1 million dollar insurance policy worth $110-120 a year? My vote is no. Although I’m sure that identity theft can be very painful and costly, if you really did all the free things above your chances of being affected are very slim. The time saved is minimal, I have a WaMu account, and the “million dollar guarantee” seems to be overkill and more of a marketing ploy. If anything, I’d use the money to go buy a good paper shredder instead.
Posted in Credit Cards, Deals & Offers | 32 Comments »
