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Wednesday, March 26, 2014

Using Credit Cards to Send You Around the World

You might ask, why is a food blogger writing about credit cards? The answer is pretty simple. I love to eat. I love to travel. I love to eat when I travel and I especially love getting to travel and eat for free. When I was a kid, my mom frequented stores that gave her S&H Green Stamps with each purchase. She dutifully pasted the stamps in a book. When the books were filled, she could redeem them for products. A toaster. Hair products. All sorts of things. With the wide adoption of credit cards, this simple idea grew exponentially into a billion dollar business. I couldn't be happier.

All but one of the photographs in the article are from a month long trip to Switzerland to the Lake Geneva Region, Interlaken in the middle of the country and Lugano in the Italian speaking south.

With the summer travel season approaching, now is a good time to look through the credit cards in your wallet. Every week unsolicited credit card offers arrive in the mail.  I don't need any more credit cards, but it's good to check out the offers. Are the terms as good as the credit card offers you're receiving in the mail?  Maybe it's time to switch.
NOT ALL CREDIT CARDS ARE CREATED EQUAL
Not all credit cards have benefits. Many are just "credit" cards.  In the simplest terms, with these cards, the bank advances you money. You are expected to repay what you borrowed at the end of the month. If you don't repay all the money you borrowed, you pay interest on the balance. That's pretty straight forward.

But since there are credit cards out there that not only loan you money but also give you a goodie bag of benefits, why not use those cards?  Banks want your business. That means you can have credit and goodies too.  And that is a very good thing.

Over the last month, I received offers from Barclay, Citi, American Express, Bank of America and Chase asking me to apply for one of their credit cards. The banks will pay me to use their money.

They'll pay me in the sense that they are offering cash back
or miles to be used to buy airline tickets, hotel stays and other purchases. The devil's bargain is simple. All I have to do is use my credit card as often as possible. Merchants pay the bank when I use my credit card. The bank hopes I will spend a lot of money, carry an outstanding balance and occasionally miss a due date so I have to pay late fees. My plan is to pay my monthly balances on time so I get the miles without having to pay interest or fees.

GETTING A CREDIT CARD IS LIKE GETTING MARRIED
As in any marriage, it is important to get to know your prospective mate before you tie the knot. The bank's agreement is a prenup. You should read those terms very carefully.

1. BENEFITS: Carefully read the terms of the agreement. Since there are many different types of benefit programs, compare and evaluate which credit cards give you what you need. Some cards give money back bonuses. Others focus on miles that can be converted into free airline travel while some are designed for travelers who want free hotel nights.  For sites that compare different credit card offers, see the list at the end of the article.
I use credit cards to accumulate miles toward airline travel, so I want a credit card that accrues miles on a 1:1 basis, or better.  Which means when I spend $1.00, I get 1 mile or point credited to my account.  One of our Master Card accounts did not charge us an annual fee. The miles were accumulated on the basis of 2:1. $2.00 spent for 1 mile credited. When our use of the card was low, that made sense, but in time we used the card more and more, so the advantage of no annual fee was not worth the miles we lost.

With some cards you accrue miles on a basis of 1:2 ($1.00 spent for 2 miles credited). That is the case with some Bank of America plans when the card is used to purchase groceries and gasoline products. With some American Airlines plans, purchasing American's products will add more bonus points to your account. Some plans give cash back instead of miles. Other plans sweeten the pot by crediting back a percentage of the miles you used to purchase airline tickets, as does American Airlines with its more expensive cards. Spend 25,000 miles to purchase a round trip ticket and the card credits 5,000 miles to your account.
Notice how many times I have to say "some plans." It's worth your while to read the fine print and pick the best card for you.

2. ANNUAL FEE: Typically, when you sign up for a credit card, the first year's fee is waived. This isn't always true, but it might be the case, so check. Annual fees typically range between $50.00  and $100.00. High end cards charge high annual fees, as much as $450.00 or more, but in return the benefits are highly prized by travelers--entry into airport lounges, free baggage allowance, discounted prices on airline products, bonus points, special offers, no foreign transaction fees, concierge services and much more.
3. AIRLINE VS BANK CARDS: Many credit cards are affiliated with specific airlines. Use a VISA card issued by American Airlines and the miles accrue for flights on American Airlines. There are many cards which accumulate points and miles that can be used on any airline. Those cards proudly tout their non-affiliation as an advantage because you can pick and choose airlines for the best deals. Personally, I have not used this type of card. I have cards which are tied to airlines: American, Southwest and United. These are airlines that fly where I tend to travel. As with any card, carefully read the fine print to see if your purchasing and travel needs are best served by a particular card's agreement.

4. SIGNING BONUSES: Many credit cards--well actually most these days in the push to sign up more customers--offer a signing bonus. The annual fee may be waived for the first year as part of the signing bonus. Typically a new user is also credited miles as a bonus. The number of miles can be an insignificant 10,000 miles or a very meaningful 75,000 miles.

Accruing those miles to your mileage account is often linked to your spending a certain amount during a specified period of time, say $3,000.00 spent in the first three months after the card is activated. Once you spend the $3,000.00, the bonus miles will be credited to your account.
Usually the best deals go to consumers who have the best credit history and who also have good paying, long term employment. This may strike some as unfair--why should one person get more than another person--but this issue is important. When you use your credit card, the bank has money you want to use. The bank wants guarantees that they will get their money back. Good credit history and current employment tell them you are more likely to give them back their money when asked, so they'll be nicer to you. Which brings up the next issue.

5. INTEREST RATES: What is APR? APR is an abbreviation for Annual Percentage Rate. That's the rate the bank will charge you for keeping their money longer than one month (or 28 days or 27 days or 30 days, depending on their definitions -- always remember to read the fine print because you may encounter a card that begins charging interest ON THE DAY YOU MAKE THE PURCHASE--I have only seen one card with that feature).

If you pay your credit card balances before the DUE DATE. You have won the jackpot. The bank gave you their money. You spent it. But you paid it back before the due date, so the bank gets no money from you. Zero. Zilch. Nada.

Which means you don't care what the APR is because you are the smartest person on the planet.  Even though the bank didn't get any money from you for all those transactions during the month, the businesses who sold you the goods and services did have to the pay the bank. So the credit card companies are making money, just not from you.
If you don't pay all of the credit card balance on time, then you will pay for the money the bank let you use.  In which case, the APR is really really important. And you should look carefully at how much interest you will pay and all the other terms that come with keeping the bank's money past that first month.

As part of the signing bonus for some cards, you are allowed without fee to transfer existing credit card balances from other credit cards. This can be a very handy way of starting over again, especially if you have racked up fees, which is the next topic to discuss.

6. MINIMUM MONTHLY PAYMENT: Minimum monthly payment is a really scary idea. The bank helpfully tells you the smallest amount you need to pay on the monthly bill. The problem is that paying the minimum amount maximizes the bank's profits. It might seem really cool and friendly to only pay $32.18 on a monthly balance of $3517.23, but the bank is hoping you'll take the easy way out, pay the minimum legally required so that they can levy their very exorbitant APR.
7. FEES: Late fees and every other fee you are liable for if you don't pay all of your monthly bill each billing cycle on time and in full are the Devil's wager you make for using credit cards. Miss a due date and you will be hit with a fee in addition to the APR costs. And those fees will themselves accrue APR charges if you don't pay off all of the outstanding balance. When people talk about slipping into a downward spiral of debt because of credit card use, this is how it happens. Many banks make their profits on the frailties of the human condition. Late fees are an important profit center. So that's the bad news.

8. CREDIT CARDS PROTECT YOU FROM FRAUD: The good news is using a credit card protects you from fraud. Buy a faulty product that the seller won't repair or replace, the credit card company will go to bat for you and challenge the seller. Someone hacks your account and uses your credit card to take a trip to Rio and stay in a 5-Star hotel for ten days. Not your problem. If you didn't use the card, you are not liable for the charges. When you use a debit card, things get complicated because the money comes directly out of YOUR account, not the bank's. With a credit card, the thief sticks a straw into the BANK's account, not yours. That is the law and the law, in this regard, favors the consumer and that is YOU.
9. WEB SITES THAT EVALUATE CREDIT CARDS: There are many more benefits and limitations that are found in credit card offers. Since they are specific to different credit cards, I've listed below some very good analyses that compare credit cards. Here are several I like.

Tasha Lockyer looks at the "Top Seven Credit Card Offers." Her analysis focuses on consumers who have the best credit. The better your credit, the better the deal.

The editors at NextAdvisor list the best credit cards, broken down by features: lowest APR, best for travel, best transfer rates from another card, best rewards, best cash back, best student, best business and best card to rebuild your credit.

Value Penguin evaluates financial opportunities--health insurance, auto insurance, mortgage rates and credit cards. They throw a very wide net, comparing thirty-three credit cards across eleven value points including annual fee, APR, signing bonus and valuations of each card based on how many points or miles you receive relative to the cost of the card (which would include the annual fee). I know that sounds like a lot of comparison points, but Value Penguin has a very cool graphic that creates a visual comparison to help guide you through the advantages of each card.

Ben Schlappig writes a blog and subscription email called One Mile at a Time  with a monthly evaluation of the ten best credit card deals. His March evaluation is posted now. Because he updates his lists every month, I find it well worth my while to subscribe to his emails, which detail his personal experiences traveling around the world.

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