The idea of doubling your money doesn't often go hand in hand with credit card use, but a new product is promising to do just that. Yet it's still a gamble for some borrowers.
The Double Cash card, launched Friday by Citi (C), offers the typical 1 percent back on purchases -- and then awards another 1 percent back on what cardholders pay on that balance each month. "It's like cash back with a side of cash back," said Ralph Andretta, head of product management for Citi Cards.
That 2 percent rate is a competitive offer among all rewards cards, not just cash back. "Two percent across the board is excellent. It's the very best offer," said Odysseas Papadimitriou, chief executive of comparison site CardHub.com. Most cash back cards offer 1 percent to 1.5 percent back.
Points Are More Popular
In the second quarter of 2014, cash back offers accounted for 40 percent of mailed credit card offers, up from 36 percent a year earlier, according to Mintel Comperemedia. They're second only to points cards, which account for 47 percent of offers. Consumers could see more high-earning cash back deals as the cards' popularity increases, said Lisa Hronek, a research analyst for Mintel. "What is that standard earn going to be as the space heats up?" she said. "That competition [for customers] drives innovation."
Only a few other cards on the market come close to the Double Cash offer, but each has limits:
The Capital One (COF) Venture Rewards card and Barclaycard (BCS) Arrival Plus offer a 2 percent rate, but in miles -- a less attractive reward currency, Papadimitriou said. Both also have annual fees.
Fidelity's (FNF) Retirement and 529 cards offer 2 percent back in points. "You need a Fidelity account to open that card, and all your rewards go into that account," said Kevin Yuann, director of credit cards for comparison site NerdWallet.com.
Double Cash doesn't carry an annual fee. There are no caps on rewards, but some transactions don't apply -- you won't earn cash back on balance transfers or cash advances, said Andretta. Any fees or interest charges in the balance paid won't generate rewards, either. Once you've earned a minimum $25, rewards can be redeemed for a statement credit, cash or a gift card.
The extra 1 percent on Double Cash, for some cardholders, might serve as extra incentive to pay off the balance fast. "They're piggybacking off that good feeling people get when paying off their bill," said Yuann. (It's not the first card to offer an incentive for paying as well as spending, but again, it's the most generous. Capital One's Journey Student Rewards offers 1 percent back, plus a bonus of 25 percent cash back earnings for paying the bill on time.)
Not Always the Best Tactic
Still, Citi's card isn't a good fit for everyone -- particularly those consumers who might be enticed into spending more, with the net result of carrying a balance. "If you don't pay your balance in full, you really need to forget about rewards and focus on finding a card with the best interest rate," said Papadimitriou. "That's how you save the most money."
After a 15-month 0 percent APR on purchases and balance transfers, Double Cash will have a rate of 12.99 percent to 22.99 percent, based on the applicant's credit score. Carrying a balance even for a short time would more than offset in interest charges any rewards earned, he said.
Double Cash may also not be the best fit for avid reward hunters, who can do better than 2 percent by chasing bonuses over several cards, said Yuann. Amex (AXP) EveryDay offers a 20 percent point bonus for each billing period in which cardholders make at least 20 purchases, while cards such as Discover (DFS) and Chase (JPM) Freedom award 5 percent cash back in rotating categories, which can result in bigger yields. This quarter, for example, Discover is offering the bonus on up to $1,500 in gas station purchases.
But that strategy requires more diligence -- users often need to sign up each quarter to earn bonuses,and pay attention to details on reward caps and eligible stores, he said. (That Discover gas bonus doesn't apply for purchases made at warehouse club and discount store stations, or using a virtual wallet technology.) Of course, the rotating rewards aren't a good deal if you aren't a big spender in the chosen category of say, home improvement or movie theaters.
7 Costly Myths About Banking, Credit Cards Debunked
Do Double Rewards on This New Credit Card Make It No. 1?
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.