All About Credit Cards

With the increasing popularity of credit cards in America, it's no surprise that credit card companies and banks continue to flood the market with all manner of cards--rewards credit cards, cash back credit cards, 0% APR credit cards--all in an effort to appeal to as many potential cardholders as possible by offering a wide variety of incentives for use. The major problem with the strategy, however, is that there's often little explanation of exactly how credit card rewards work in their respective programs: what's the difference, for example, between cash back cards and rewards credit cards? And which card will, in the end, save you more? The variety and sheer number of rewards programs leaves some potential cardholders confused about the actual market value of their "points" values.

The most prevalent credit card rewards plans out there today fall into two different categories -- percentage-based rewards and points-based systems. The former offers a percentage of your money back on purchases in certain targeted categories, most commonly gas, travel, and in some cases entertainment. The latter offers a series of "points" for all purchases made, which can eventually be redeemed for reimbursements on various expenses, most commonly travel. The percentage rewards plans are fairly straightforward (except for a few obscure snags, such as how your cash actually gets back to you and how much you can earn in any given year through credit card rewards), but in the case of "points", it's often difficult to determine exactly what you're getting for your purchases using a points-based rewards credit card.

But in the end, it all comes down to the numbers, specifically the math formula used to calculate the rewards. A good percentage-based rewards credit card will offer anywhere from 3-5% back on targeted purchases (again, commonly gas and travel.) If you spend $1,000 at the pump in a given year (which, with current gas prices, is a pretty low amount to spend on gas in a year), you'll earn $50 back in rewards at a 5% rate. For a year's worth of gas purchases, $50 isn't a huge amount of money, but it'll fill you up twice and it's certainly better than nothing.

Compare this to "points" systems. One points system (from Chase's Free Cash Rewards Visa) offers a rewards rate of 2,500 points for $25, with one point earned for every dollar of purchases. That's only a 1% rate of return on the money you put into the card. Certain airline credit cards offer a slightly better deal, such as American Express's Blue Sky, which allows you to redeem points (again, one dollar per point) in 7,500 increments for a $100 reimbursement on travel expenses, meaning about a 1.3% rate of return. Again, even a low rate of return can help to offset any expenses you may incur, and can make certain purchases essentially free. But 1.3% versus 5% -- you do the math.

On non-targeted purchases, points systems and percentage rewards credit cards even out, since most percentage reward cards offer a 1% rate of return on the majority of non-targeted purchases you make. And the "points" cards can offer a few incentives that a percentage rewards credit card can't, such as bonus points on sign-up, anywhere from 1,000 to 15,000 and up (depending on the value of a given points system, of course.) But, assuming that you frequently purchase the targeted items on a percentage rewards credit card (and who doesn't make frequent gas, travel, and entertainment purchases?), you've got a slight edge with percentage-based rewards programs.

Check all of the fine print and consider your specific purchasing needs, of course, but remember one of the first rules of finance: when dealing with credit card rewards, always look at the long term and make sure to do the math.

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CHAMPIONSGATE, Fla. -- TransUnion, a leading global information solutions company, today led a general session panel discussion entitled "Gearing up for Bankruptcy Reform - A Unique Industry Perspective" at the 14th Annual Credit Card Collections Conference in ChampionsGate, Florida.

The panel was comprised of industry leaders from Citibank; the Association of Independent Consumer Credit Counseling Agencies; Money Management International, a credit counseling company; and a leading bankruptcy law firm. Participants discussed their respective roles in preparing for the bankruptcy reform laws that went into effect today. The panel also addressed new technologies and processes aimed at helping lenders, collection agencies and credit counseling companies more effectively work together in the post-reform environment.

Addressing a crowd of more than 200, panel moderator Mike Rosenthal, director of Debt Management Solutions at TransUnion, initiated the discussion by saying, "some innovative tools have entered the marketplace to assist credit grantors in devising treatment strategies that match an individual consumer's financial situation. Our panelists today represent industry leaders who are adapting and improving their roles based on this technology and on the needs of both consumers and businesses."

Earlier this year, TransUnion announced a debt management model, which credit counseling companies can use along with their core services to quickly assess whether consumers exhibit strong indicators for rehabilitation through temporary budget restructuring or a debt management plan. The score also assists lenders in making objective decisions to offer improved concessions, such as lower minimum payments, reduced interest rates or the removal of late penalty fees to those consumers who are most in need.

In addition to the bankruptcy reform discussion, TransUnion shared insights during the conference's "Collection Technology Showcase" on October 16. Michael Browning, president of TransUnion's direct marketing agency, Douglas-Danielle, contributed to a panel discussion on Online Collections. TransUnion offers an Online Payments solution that provides collectors with a customized Web site for collecting past-due payments that is cost-effective and less confrontational for consumers than traditional collection methods. Kevin Derbyshire, senior consultant in TransUnion's Analytic Decision Services group, shared his expertise in a panel discussion on Scoring and Strategy Management. In the scoring arena, TransUnion offers incidence-based models to help collections organizations identify which customers are most likely to pay in order to prioritize work effort and apply the most cost-effective treatment strategies.


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Some homeowners struggling to keep up with their adjustable-rate mortgages are choosing a short-term fix that will only compound their troubles down the road, consumer protection experts say.

“We’ve had some people who are using their credit cards to cover basic living expenses so they can actually make their mortgage payments,” Rebecca Palmer, director of education for Consumer Credit Counseling Service of New Hampshire and Vermont, told the New Hampshire Sunday News. “It’s absolutely horrifying.”

“Because the thing is, they’re digging a deeper hole instead of finding a solution to the problem,” she said.

Counselors at her organization, which provides free, confidential counseling, are increasingly hearing from homeowners that they are taking cash advances on credit cards to make their monthly mortgage payments — or even contacting their mortgage companies to see whether they can pay with a credit card, Palmer said.

“Unfortunately, they don’t realize how much worse they’re going to make it for themselves,” she said.

David Deziel, director of communication and development for CCCS NH-VT, said the agency recently counseled one such family from Alton.

“Their monthly mortgage payment right now is a little over $3,100 a month, and these are folks whose household income is under $100,000,” he said. The married couple, who are in their 40s and have two children, are also paying off a home equity loan.

When the wife became ill, Deziel said, “They started making heavy use of credit cards to make ends meet.”

And by the time they came to the credit counseling agency for help, “They had almost $23,000 in outstanding credit card debt.”

Another recent client with an adjustable-rate loan had seen his mortgage payments jump from $900 a month to $1,700 a month — with a 14 percent interest rate, Deziel said.

The trend is bad news, said David Rienzo, assistant attorney general in the Consumer Protection and Anti-Trust Bureau at the AG’s office.

“If you can’t pay your normal monthly expenses and your mortgage, the smart thing to do is go get some credit counseling right away, rather than use a credit card until you not only can’t afford the mortgage but also now are stuck in over your head on a credit card as well,” Rienzo said.

Mortgage payments typically include both principal and interest, he pointed out; putting such payments onto a credit card means you’re paying interest twice.

According to Deziel, there are several “trip wires” that can increase your interest rate on a credit card, such as exceeding your credit limit or making a payment late. “That rate can jump to 28, 29, 30 percent on all of your outstanding balances,” he said.

According to Rienzo, credit card companies are bound by the laws of the states in which they are headquartered. And some states, including New Hampshire, do not have usury laws, so there’s no cap to the interest rates the companies based in those states can charge.

Taking on credit card debt will also worsen your credit score, Rienzo noted, which could increase the cost of future borrowing.

And then there’s something called “universal constructive default,” which, Rienzo explained, means if you default on one credit card, your other card companies can raise your interest rates too.

Recent changes in bankruptcy laws have also made it more difficult to walk away from credit card debt, experts say.

Dan Hebert has 23 years of banking experience, and is now president of New Hampshire Jumpstart Coalition, an all-volunteer organization dedicated to improving financial literacy for children.

Hebert noted a recent report by Mintel International Group, a consumer research company, found that credit card companies are actually pushing subprime borrowers to open new accounts.

The report found direct-mail offers from card companies to these borrowers rose 41 percent in the first half of 2007, while offers to customers with the best credit fell by 13 percent, according to published reports.

Subprime borrowers typically pay higher interest rates on credit cards because of poorer credit scores, and are more likely to only make minimum payments, which extends their card balances, Hebert said.

Deziel’s advice: “If you’re tempted to use your credit card because your mortgage payments have become too high, just stop yourself for a moment and think about what the problem is. The problem isn’t that you’re spending too much on groceries; the problem is the mortgage.”

And that’s where homeowners need to start, by contacting their mortgage companies to try to restructure their loans and avoid foreclosure, he said.

His agency can help consumers, but they need to seek help early, Deziel stressed, before the debt load becomes insurmountable.

He noted CCCS often gets calls from people whose homes have already been advertised for foreclosure auction.

“At that point, it’s too late. There really isn’t much we can do about it.”

As bad as the subprime mortgage mess has been so far, Hebert says the worst is yet to come. “The other shoe to drop will be a spike, in another 18 months, of bankruptcy filings for folks who weren’t able to hold onto those homes,” he predicted.

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“First, it is true that if you walk up to a cash register at an Apple Store with $399 in cash [to buy an iPhone], you will be told that you need a credit or debit card,” David Berlind blogs for ZDNet. “As I’m taking four $100 bills out of my pocket, the clerk informs me that I must pay with a credit card.”

“Just as interesting however is the fact that you don’t need a credit/debit card for the entire purchase. When it became clear that my $399 in cash was no good at the Apple Store (for an iPhone), the clerk that I spoke with suggested that I pay $1 of the purchase price with my credit card and the rest in cash. This of course makes it clear that Apple needs the information on your credit card for something important,” Berlind writes. “But what?”

“Apple apparently is in a bind right now. It’s in a cat and mouse game with hackers who have made it possible to divorce (”unlock”) Apple’s iPhones from the AT&T wireless service that Apple is contractually bound to keep the phones married to,” Berlind writes.

Berlind writes, “As far as unique indentifiers go, credit cards are a pretty good token for authenticating someone’s identity. At the very least, Apple is probably retrieving (from the credit card) and keeping the name of every person who buys an iPhone. This way, when you go to buy another one, they can see if an iPhone has already been purchased by someone with the same name. But then comes the question of whether they are retaining your credit card number as well. How could they not?”

“Although nobody has yet to go on record, as it turns out, there’s a security and privacy standard called PCI DSS that practically every participant in the credit card ecosystem is required to adhere to. As far as I can tell, the standard policy potentially yields two important results. First, it protects the privacy of cardholders. Second, it helps merchants and card issuers manage risk,” Berlind writes.

“If Apple is using credit card numbers for the purpose of tracking (as seems to be the case here) — that Apple might not only be in violation of PCI DSS, it could also be breaking some laws (some of which are based on PCI DSS) as well as breaching the terms of its agreements with card issuers and credit card companies,” Berlind writes.

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Choosing a credit card is not a simple task. You need to consider what you are going to use the credit card for and only then you’ll be able to make up your mind. A credit card is a complex financial contract that provides the applicant with several different services you but not all of them have to necessarily be used.

Rate or Fees?

If you plan to pay off the balance each month and thus won't incur in any finance charges, a low interest rate is less important than finding a card with no annual fee, no or small transaction fees and any rewards program that you can use to your advantage (miles if you travel a lot, gas if you use your car often, etc.)

If you’ll carry part of the balance to the next month or you need to finance purchases due to not having a steady income, a long grace period, a low interest rate and a balance calculation method that minimizes your finance charges is what you need. There are many credit cards that offer this kind of services, you just need to look for them.

Reducing Costs

All credit cards will cost you money to use, but depending on the terms and conditions, some are more expensive than others. When considering a credit card offer, check these factors:

It's important to know how an interest rate is calculated. A fixed rate will stay the same over time, but a variable interest will rise with the prime rate. It can be low today but rise every month. Be sure to determine what the interest rates are for different charges, such as balance transfers, cash advances and purchases.

You’ll also need to understand how the outstanding balance is calculated to determine the finance charge. Make sure to know how many days in the billing cycle you have to pay off the balance before you are hit with a finance charge. This varies from one credit card to another and can really make a difference.

Some cards charge an annual fee, which you may or may not be willing to pay. If the card has a lower interest than other others, it may be worth it. Otherwise, try to get the credit card with the lowest annual fee or no annual fee at all if possible. It makes no sense paying for something that you can get for free.

Even if you always pay your bills on time, be sure to find out about the card's late fees, over-limit fees and any other penalties you may incur when using the card. You never know what may happen in the future and such fees can raise your debt significantly if they are too excessive. Be sure to read the fine print. Credit card companies must disclose interest rates and fees, but some fees are buried deep in your user agreement.

When you go to a gas station, you have two choices. You can either walk up and hand the teller some cash or you can use a credit card. Besides just the convenience of using a credit card and being able to get out of there much faster, a credit card can actually save you a lot of money!

Most cash back or rewards credit cards, especially those that are linked to gas companies will actually give you 5% back on whatever money you spend with them on gas. So, yes, if you bought that same gas with cash, you would be spending 5% more.

Let me just put it this way, would you save spend $100 for something of $105. Of course you would chose the lower number.

Let's just, for a second, assume that you spend about $50 a week on gas (given the way the prices are raising, most spend even more)! This means that you are spending about $200 a month and $2,400 a year.

Well, if all you do is charge that gas to a credit card and delay paying it until the end of the month with 1 easy payment, you can instantly save $120/year.

It may not seem like a lot of money right now, but think about it:

- All you have to do is switch the method of payment.
- Credit card payment is actually easier
- Credit card payment is faster
- And, credit card payments help you build your credit score (as long as you make the payments on time).

But here's the kick! Most of these same cards will not only give you 5% on gas, but also on other places like groceries. The rest of the places they give you 1% back.

So, all you need to do is switch your method of payment and you can instantly start saving money on everything you buy, no matter what. Just make sure to stay within reason when you are using your credit card and only charge that that you know you can easily pay off.