Since I was hired at the financial empowerment website MagnifyMoney six months ago, I've spent my workdays looking at the best (and worst) balance transfer deals, rewards credit cards, checking accounts, savings accounts and personal loans. But in a prime example of inertia, I've been slow to change my financial products, even after spending half a year being inundated with hard evidence that many of my money-related decisions were inferior.
Finally, I Joined a Credit Union
My decision to join a credit union wasn't actually based in a desire to use it as my primary bank.
Credit unions should be lauded for their ability to offer Americans an alternatives to the mega banks. They work solely to serve their members, who are also the owners (to join a credit union, you buy a share). Big banks, by contrast, often serve their shareholders at the expense of their customers, which is why customers are served up high overdraft fees and maintenance fees on one side, and infinitesimally low interest rates on their savings accounts on the other.
However, most credit unions still feature brick-and-mortar branches, where they need to keep the lights on. While their fees are less than those of the big banks, those fees do exist.
The reason I decided to join a credit union wasn't to escape the clutches of a monolithic bank (I'd already opted into Internet-only banking) but rather, to get a credit card.
Why Get a Credit Card from a Credit Union?
I'm a millennial anomaly. I've never carried debt. No auto loans. No mortgages. No student loans. No personal loans. No interest ever paid to a bank or lender. None. (Note: I don't consider using a credit card being in debt if you pay off your entire bill on time and in full each month, because if you do that, you pay no interest.)
I have a sizable emergency fund, money invested in non-retirement accounts that could be liquidated if I needed to and a savings account. Should an emergency befall me tomorrow, I'm theoretically prepared.
Despite all this, I decided to get the Promise Visa (V) Card from Pentagon Federal Credit Union to put in my safety deposit box, in case of emergencies. The Promise Visa offers a 9.99 percent annual percentage rate and no penalty APR. This APR is subject to change with the market based on prime rate, but it will likely stay significantly lower than competing credit cards.
In Case of Emergency, Break Plastic
Let's say a series of unfortunate events occur, and I suddenly need $7,000 to cover emergency bills.
Perhaps I don't feel comfortable draining my emergency fund to zero or liquidating an investment. Even worse, what if I get hit by a bunch of issues all at once, my emergency fund has already taken a hit, and I can't afford to pay so much in one fell swoop.
The Promise Visa provides an option to avoid predatory lenders. At a 9.99 percent APR, I could take on the debt at a relatively low interest rate. I could always elect to do a balance transfer later or shop around for a personal loan at a lower interest rate -- once matters had calmed down.
Credit cards are not the ideal way to manage your debt. Their interest rates are often higher than personal loans or a personal line of credit -– assuming you have an excellent credit score. Anything less than an excellent credit score often leads to loan interest rates in the double digits. But sometimes you need to make a payment quickly, and don't have time to shop around for the cheapest alternative.
Personally, I view this type of credit card as a fire extinguisher housed in a glass case. You don't want to break that glass unless you really, really need it. But you do want the fire extinguisher to be there.
Why the PenFed Promise Visa?
I did my due diligence. As of this writing, PenFed is unbeatable in terms of APR, and it has no hidden traps, no fees and -- perhaps even best -- simplicity. Recently, MagnifyMoney.com (as mentioned before, my employer) awarded the PenFed Promise Visa our first A+ transparency score. The Promise Visa only has one page of terms and conditions, no penalty APR and no annual fee.
You do need to be a member of PenFed to apply, so if you aren't already a member it will cost $20 to join -- $5 to keep in an active savings account and $15 one-time donation. However, PenFed also offers incredibly low interest rates on mortgages and auto loans, so it's a shrewd move to become a member.
The Best vs. the Worst
Let's compare this A+ credit card to one of the worst one the market today.
PenFed Promise Visa offers no annual fee; introductory APR of 7.49 percent for 36 months, then a set 9.99 percent; no penalty APR; and credit limit ranging up to $50,000.
First Premier Bank -- America's 10th largest issuer of Visa and MasterCard (MA) -- offers what can only be described as an F-level credit card. Potential cardholders need to pay a $95 processing fee to even apply for the card. Once approved, they'll owe a $75 annual fee. In year two, the annual fee is $45, but cardholders have to pay an additional monthly servicing fee, which costs $6.25 a month (or $75 annually). To top it all off, First Premier Bank charges a 36 percent APR and includes heaps of fine print, including disclosure that the credit limits are $300. Customers would need to spend $170 for a $300 credit limit.
Diversification is Key
Diversification is a fundamental concept for anyone learning about personal finance. However, while must discussions on the topic rightly focus on diversifying your investments, a similar case can be made for financial products. Savvy consumers should always be on the hunt for the best deals and integrating them into their financial portfolio. Even if you've covered the bases on emergency planning, it's smart to include some diversity and redundancy in your financial arsenal.
Erin Lowry writes for DailyFinance on issues relating to millennials, money and personal finance. She's also the blogger behind Broke Millennial, where her sarcastic sense of humor entertains and educates her peers. She is also the brand and content manager of MagnifyMoney.
7 Costly Myths About Banking, Credit Cards Debunked
Why Her Emergency Money Backup Plan Is a Credit Union Visa
Yes they can.
The CARD Act did get rid of the most outrageous abuse: they can no longer increase the interest rate on existing balances unless you go 60 days past due.
However, you need to remember that:
Most credit card interest rates are variable and are linked to the prime rate. Your high rate will only go higher when interest rates increase.
Based upon risk, your credit card company can still increase your interest rate on all future purchases. Your existing balances are protected, but future purchases would be at the higher rate. And determining risk is not limited to your behavior on your existing card. If you miss a payment with another lender, that could lead to an increase on all of your credit cards.
After 12 months, they can increase your rate for almost any reason. But the increased rate only applies to future purchases, and they need to give you 45 days notice.
Credit cards are incredibly expensive ways to borrow money. If you use a card, your goal should be to pay off the balance in full every month. Then, the interest rate doesn't matter.
Bottom line: If you do have debt, you should never be paying the purchase APR. Look for a balance transfer, or get a personal loan to cut your interest rate. And take a long hard look at your spending to put more money towards paying off that debt.
No, they are not.
There is a big difference between a 0% balance transfer (where the interest is waived during the promotional period, discussed above) and 0% purchase financing offered at many stores (where the interest is only deferred).
I regularly encourage people to use balance transfers to help them pay off their debt faster. With a balance transfer, interest is switched off or reduced during the promotional period. Once the promotional period is over, interest starts to accrue on a go-forward basis. This can take years off your debt repayment.
But stores offer 0 percent financing at the checkout. With a lot of these programs, interest is charged from the purchase date if you do not pay off the balance in full during the promotional period. So, if you have a 12-month 0 percent offer -– and do not pay off the balance in 12 months -– then in month 13 you will be charged a full 13 months of interest. They retroactively charge interest, and it will be like you never had a 0 percent offer at all.
This is a common practice. Online, Apple (AAPL) does this, via their partnership with Barclaycard (BCS).
Bottom line: I don't like deferred interest deals. Most people do not understand the difference between waived and deferred interest, and this practice feels deceptive. If you take one of these offers, make sure you pay off the balance in full before the promotion expires.
Credit card companies have different rates for different types of transactions. The interest rate charged on a purchase (high) is different from a balance transfer APR (low).
Before the CARD Act, banks would apply your payment to the lowest APR balance first. Imagine you have a $1,000 balance. $500 is at 0 percent (balance transfer), and the other $500 is at 18 percent (purchase). If you make a $100 payment, banks would apply that to the balance transfer. That way, they reduce the balance transfer (at 0 percent) to $400, while protecting the $500 purchase balance (at 18 percent).
The CARD Act changed that. Banks now need to apply payments to the highest interest rate first. But this only applies to payments higher than the minimum due.
If you only pay the minimum due every month, your payment will still likely be applied to the lowest interest rate balance first.
Bottom line: You should never spend and have a balance transfer on the same credit card. Banks can only "trap" balances when you have multiple balance types on one card.
Not exactly true.
The CARD Act has stopped the handout of T-shirts on the steps of the school libraries, but they can still give sign-on bonuses. And they advertise on campus. For example, Citibank (C) has a "Thank You Preferred" card for college students. If you spend $500 in the first three months, you get 2,500 thank you points as a bonus. That is $25 of value.
Bottom line: I actually find this worse. Before, you got a free T-shirt just for signing up. Now, the credit card companies encourage spend on the card for the "free gift."
In the past, banks would charge you a fee if you went over your credit limit. Today, the CARD Act requires banks to receive your consent to charge an over-limit fee. So, in most cases, banks just eliminated those fees -- which is good news (kind of).
You can still go over your credit limit, if the bank approves your transaction. But the full amount by which you've exceeded your limit will be part of your minimum payment come the next bill, which could cause a payment shock.
More importantly, utilization (the percentage of your available credit that you use) is a big factor in your credit score. Your credit score determines the price you pay for credit. So, if you're over-limit on an account, you are considered riskier. That can result in the credit card company increasing your interest rate. And it could also result in other lenders increasing your rates with them. So you do pay, but it's an indirect cost.
Bottom line: We're glad the fee is gone, but you still need to be diligent and try to avoid going over your limit. If you pay your balance in full every month but are frequently bumping up against your credit limit, ask for a credit line increase.
I have heard from so many people that the way to eliminate overdraft fees is to opt out of overdraft protection. But it is impossible to completely opt out of overdraft.
Federal regulation requires consumers to opt into overdraft protection only for debit and ATM transactions.
But, the regulation does not cover checks and electronic transactions (including bill-pay and monthly direct debits, like gym memberships). The banks have all the power. If they approve the transaction, you would be charged an overdraft fee (typically $35 per transaction at banks and $25 at credit unions). If they decline the transaction, then you would be charged an NSF fee (non-sufficient funds), which is usually just as expensive as the overdraft fee.
Bottom line: You can't opt out of all overdraft fees. To avoid them, keep a buffer or find an account, like Ally, that doesn't charge those junk fees.
Not always true.
To be protected, you need to report the fraudulent transaction within 60 days. Otherwise, you give up a lot of your rights.
On ATM/debit cards, the bank can make you responsible for up to $500 of fraud if you report more than two days (but less than 60 days) after the transaction. On a credit card, you would never be liable for more than $50 (and most banks won't even hold you accountable for $50.)
One area where you will almost always lose is when your Personal Identification Number is used. If someone manages to get your PIN and takes money out of your account, then the bank will almost always assume that you authorized the transaction. Make sure you change your PIN often and never write it down.
Bottom line: Avoiding liability it your responsibility. Track your transactions regularly and call as soon as you detect any suspicious activity. And make sure you never share your PIN with anyone, or make it obvious.