Credit Card Nation

PART ONE. Dead Beat Delight: Cash Back on free Credit!
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The first issue in selecting a credit card is whether your spending habits classify you as a CONVENIENCE USER or a REVOLVER. If you pay off all of your purchases each month, then finance charges, late fees, and over-limit penalties don't really matter. Lucky You! The MOST important issues to you are the Annual Member-ship Fee, Length of Grace Period, Rebate Programs, and Card Member Services. Convenience Users should select a card with a low or free annual membership, long Grace Period (25-30 days), and with Rebate (1% cash back or free gifts)⁴ and/or various Membership "Enhancements" such as free auto rental insurance which are summarized here.⁵ When you find a credit card that offers all of these features--CONGRATULATIONS--you are enjoying the Dead Beat Delight = NO ANNUAL FEE + Long Grace Periods + Membership Benefits + Rebates

So, for CONVENIENCE USERS, we recommend that you examine the credit card companies listed in Table 1.⁶ Note, these membership benefits are based on introductory "starter" or "Basic" credit card programs and therefore do not offer many benefits to students. Over time, however, it is possible to upgrade these accounts to GOLD or PLATINUM status, especially after one year of regular payments. Of course, the terms and conditions of credit card accounts are frequently changed by the corporate barons of the Credit Card Nation. So, you will need to consult this guide again if you plan to shop for a more cost effective credit card at a later time.

The key to selecting the BEST card for you--as a Convenience User--is the combination of low-cost membership, extended grace period, desired membership benefits, and rebate programs. First, the annual membership fee can always be waived the first year. If you do not pay at least $25-$30 in finance charges, however, the bank will most likely require a membership fee when the account is renewed. If you are in a rebate program that accumulates purchase "points" for free gifts or discounts, it may be better for you to negotiate a low annual fee and remain in the program until you claim your gift. Otherwise, cancel your account and replace it with another no-fee card. Second, check out the "Grace Period." This is the length of time that you are given to pay your bill without a finance charge. In our lists, the Grace Period ranges from a low of 10 days (Bancorpsouth) to a high of 33 days (People's Bank). That's a difference of over three weeks in using OTHER PEOPLES' MONEY for FREE! Always make sure to send in your payment early so you will not pay a finance charge or late fee!

Third, what kind of rebate programs are YOU interested in? Free gifts (gasoline, merchandise, airline tickets) or rebate coupons from your favorite retail store (fabric, groceries, CDs). What about "saving" for a down payment on a car. Some suggestions include Citibank "Driver's Ed" Visa, Chase Shell MasterCard, and People's TJX Visa.⁷ If you are not thrilled with retail rebates, what about a "cash back" program which allows you to cancel your account AFTER receiving a check or cash credit at the end of the year. Our recommendations include Advanta Visa, Discover, and GE Capital MasterCard. This way you do not have to pay an annual membership fee and can shop for better deal. Note, most of these rebate programs feature a maximum of 1% back. It is ALWAYS better to take $50 in cash than a $50 gift. But, be careful. Not all "cash back" programs really mean what they say.⁸

As for "frequent flier" credit card programs, unless you charge at least $700-$800 per month and fly a couple of times per year, it is more cost effective to enroll in a cash back program. For instance, the American Airlines-Citibank "co-branded" Visa offers free airline tickets. However, the annual membership fee ($40-$60) adds up by the time you qualify for a free ticket--over $200 during your college career. Your "free" ticket could be costly, depending upon how much you charge and how often you fly, especially when compared to other "cash back" programs and comparable discount air fares. Remember, if you plan to by a new car after graduation, you can get a rebate for 2% of all your charges for the down payment!⁹

By the way, you ask, what about the American Express charge card? Isn't it the best deal for Convenience Users? Well, yes and no. Yes, if you do not have enough financial discipline to limit your charges to available income. All purchases on your AMEX card must be paid at the end of the month. No exceptions! Remember, even President Clinton's American Express card was rejected last spring! On the other hand, unless you really believe that the American Express charge card offers you a degree of respect or social status--like Jerry Seinfeld (a paid celebrity endorser!)--it's a bad deal. That is, if you can pay off your monthly purchases as required by the American Express charge card, then you could save the annual fee by using Discover, Visa, or MasterCard instead.

Afterall, what DO YOU REALLY GET for the $55 basic membership fee (plus $25 per year for the Membership Awards Program)? Discount coupons on expensive items that you don't want or can't afford? Ten minutes of free phone calls each month! A discounted plane ticket with so many restrictions that you may not use it? Of course, if you travel frequently and have the resources to pay for ALL of your charges at the end month, then a low credit limit on your Visa may be a major inconvenience. In this case, an AMEX card is worth the membership fee and may become as important as a [tourist] visa during your travels. Even so, remember that most merchants would prefer that you "Leave Home Without It" due to the higher cost of accepting the American Express charge card.¹⁰

In conclusion, GREAT NEWS for Convenience Users--there is a "free lunch." With our guidance, you can find a no Annual Fee credit card, with a long Grace period, that allows you to avoid finance charges. Not only can you get free credit, but we show how to receive free gifts and discount coupons simply for borrowing the banks' money for free! In the corporate world, such shrewd behavior is considered "good business sense." But, when consumers practice what big businesses preach, they are viewed as "stealing" from corporate profits. This is why prudent shoppers are negatively portrayed by banks as "dead beats." Ben Franklin must be rolling over in his grave! Remember "A penny saved is a penny earned"? Today, it's called the "Dead Beat Delight." Of course, if circumstances change and you find yourself in debt, you may need to replace your "convenience" card with a more cost effective deal.

On to part two: ------>

4 (return to text) Discover offers 1% "cash back" on ALL purchases--not merely your balance. Some banks also offer 1% cash back programs on purchases using their Visa or MasterCard such as Chevy Chase Bank Visa (acquired by First USA) or free gifts based on points "earned" by volume of charges such as the Chase MasterCard. Some banks have special "co-branded" agreements with other corporations where charges on their credit cards accumulate "points" for free gasoline (Chase-Shell Oil), down payment on a automobile (Citibank-Ford), or free airline tickets (American Express-Delta). Other credit cards may offer a donation (less than 1%) to your favorite nonprofit organization such as FIRST USA's college alumni program. For some cash back programs, there is a minimum amount that has to be charged within a specified period or you have to an unpaid balance. If these conditions are not satisfied, you may not qualify for a cash rebate or it is less than the maximum amount. For example, the Associates MasterCard offers "3% cash back" on purchases but only if you have an unpaid balance. The maximum rebate is $20 per month AND a total of only $100 per year. And, unlike Discover or Visa rebate programs, if you pay off your charges each month, FORGET about the cash. Associates only pays a cash rebate when YOU pay a monthly finance charge! Talk about encouraging poor spending habits.

5 (return to text) For our evaluation purposes, the following CHECK-list summarizes most of the available Membership "Enhancements." These ten categories describe the membership features that help you decide which credit card is best for you. When you call customer service, ask if the credit card offers the following:
[1] rebates on purchases (cash back, gifts, or discounts);
[2] extension of manufacturer's warranty on purchased items;
[3] purchase protection/security of items paid by credit card;
[4] travel accident insurance (airline travel charged to credit card);
[5] discounts on travel related purchases such as hotel rooms, rental cars, and entertainment;
[6] insurance on rental cars;
[7] discounts on non-travel related goods and services
[8] credit card registration programs;
[9] reduced introductory interest rate offers;
[10] other (non specified).

6 (return to text)
Dead Beat Delight: Great Deals for Convenience Users

Credit Card Company Rebate* Annual Fee** Membership***
Enhancements Toll Free
Telephone

Advanta Visa 1% cash
includes balance transfers $0 4 (800)
833-6980

Bancorpsouth Bank (Hancock) Visa fabric coupons 3% store, 1% other purchases $0 --- (800)
844-2723

Centura Bank Visa 0.5% cash (under $5000) 1% (over $5000) $0 4, 5 (800)
236-8872

Chase Manhattan (Shell) Visa free gas 5% gas, 1% other purchases $0 1, 3 (800)
FREE-GAS

Chevy Chase Visa (First USA) 1% cash $12 4, 9 (800)
937-5000

Citibank Drivers' Ed Visa 2% automobile down payment ($1500 maximum) $0 4 (800)
950-5114

Discover (Greenwood Trust [M.S.D.W.]) 1% cash $0 4, 7 (800)
347-2683

First USA Giant VISA free groceries 3% Giant, 1% other purchases
$0 --- (800)
211-7339

GE Capital Consumer MasterCard 2% cash on program purchases $20 2, 3, 4, 5,6, 7 (800)
677-1050

People's Bank Maxx TJX Maxx Visa coupons 3% store, 1% other purchases $0 4 (888)
426-1115

*Rebate programs with retailers are designed to reward customer loyalty with financial incentives (discounts). Hence, these "frequent shopper" programs offer higher rebates on their own retail products. For example, Shell offers a 5% rebate on purchases of Shell gasoline and only 1% on all other purchases. Note, the $20 membership fee is waived "as long as at least nine Shell station purchases were made in the prior year with your Shell MasterCard."

**It is is usually fairly easy to negotiate a waiver of the annual membership fee for the first year. However, if you do not pay at least $30 in finance charges during the year, the bank will most likely impose a membership fee when the account is renewed.

***These membership enhancements are based on BASIC or STANDARD introductory credit card programs. Hence, they do no offer many benefits to young customers whom are unfamiliar with these services or may not use them. It is possible to upgrade these accounts, especially after one year of making regular payments, to GOLD or PLATINUM status. However, you may have to pay a membership fee if you did not pay finance charges during the preceding year.

7 (return to text) If you are not satisfied with this list, you may wish to explore the web sites of the major credit card associations and search for new offers by their members. These include www.mastercard.com, www.discovercard.com, www.americanexpress.com/student, www.visa.com. Similarly, you may wish to search the web sites of specific banks to examine their rebate programs. See also "Card Issuers Hike Fees and Rates to Bolster Profits", Consumer Action (CA) and Consumer Federation of America (CFA), 5 November 1998 @ www.consumerfed.org. Lastly, CARDWEB.COM, INC. compiles a list of over 85 programs in its "Reward Credit Card Report." They examine incentive programs such as air miles, points towards product/services, or cash-back. You can order it for $12 [No, we do NOT get a rebate!] by writing to them at P.O. Box 1700, Frederick, MD 21702.

8 (return to text) Some companies are more greedy than others and most do NOT expect you to read the microscopic "fine" print. For example, The Associates Visa card declares that "You get 3% cash back" BUT only if you have an existing debt on your credit card AND when "the total of [your] payments... to your account is LESS than the Previous Balance on your current statement." Hence, you only get "cash back" when you are paying finance charges! And, the maximum rebate is $20 per month and only $100 for the year--an average of about $8 per month. Compare this modest rebate to the finance charges that you will pay over the year and you will find that the "cash back" award is merely a small reduction in the total interest charges that can jump to 25.99% APR! Can you spell R.I.P.O.F.F.?

9 (return to text) For example, if you have an average of $250 per month in charges or $3,000 per year, it could take you five years to qualify for a free airline ticket--depending upon how often you fly and the number of required points. In this case, if your annual membership fee is $50, the "free" ticket cost you approximately $400. That is, 5 years of membership fees $50 ($250) plus the $150 that could have been earned in a 1% cash back program. Could you have found a cheaper flight four $400? If you charge an average of $1,000 per month, you would qualify for a free ticket in two years. In this case, the "free" ticket would cost $340. That is, 2 years of membership fees ($100) plus the $240 that could have been earned in a 1% cash back program. Remember, by participating in "free gift" rebate programs, you are locked-in a credit card agreement until you redeem your accumulated points. ADVICE, take the ca$h.

10 (return to text) Although AMEX is gradually reducing its transaction fee, it is still much harder to use than Visa or MasterCard. For an entertaining look at the "privileges" of AMEX membership, see "Leave Home Without It: The Absurdity of the American Express Card," in Michael Lewis, The Money Culture," New York, Penguin Books (1992).

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