The Writers Coin

I was watching Good Morning America yesterday morning and a very disturbing story about credit cards came on.

It featured Kevin Johnson, a responsible credit-card user that had recently seen the limit on his American Express Blue card go down by $7,000. What could possibly cause AmEx to lower his limit when he pays his card in full every month, has a 764 FICO score, and owns his own business?

The answer? Behavioral analysis.

Turns out credit-card companies are using psychology to determine who is worthy of their credit and who is not. The story went on to say that behavioral analysis was probably the factor behind the lowering of Kevin Johnson’s limit.

But what changed about his shopping behavior that merited this huge drop in credit?

The answer: Kevin Johnson had recently visited a Wal-Mart that he doesn’t typically go to, and the reason AmEx gave him was:

“Other customers who have used their card at establishments where you recently shopped have a poor repayment history with American Express.”

So this is what we’ve come to: now you can be punished for other people’s behavior if you shop at the same places they shop.

One of the very first personal-finance pieces I ever wrote was about Bank of America’s Keep the Change program (it was years ago and it wasn’t for this blog, I was trying to get it published in a magazine. It never happened). At the time, I thought it was a great idea and gave customers a creative way to save money without having to think too much about it.

Here’s how it works: Every time you use your debit card to buy something, your total gets bumped up to the nearest dollar and the difference is shot over to your savings account. So if you bought a soda for $1.23, your BofA statement would charge your card for $2 and 77 cents would be deposited into your savings account. Poof. Just like that. And for the first three months, they will actually match your savings at 100%. That means that, on that last example, you’d be getting $1.54 sent into your savings account. After the first three months they match at 5% with a total limit of up to $250/year.

That’s awesome, isn’t it? But I never gave it much thought because, even though I’m a BofA customer (my tribulations have been well documented), I’m a credit-card rewards person. I buy everything with my card and accumulate points, which I then turn into cash. It never occurred to me that the two savings programs might comparable. And after a little bit of research , you might be surprised to see what I found.

Keep the Change

I decided to run a simulated savings year with Keep the Change to see what I would’ve saved if I was using their program. I took the last two months of credit-card activity, figured much I would have deposited into my savings if I was using my debit card, and then added any matching funds. Here’s what I found.

Bank of America will match those funds for the first three months at 100%, so that means for a hypothetical three-month period, I would be saving $96.

For the rest of the year I would be matched at 5%, which means those months would net me $151.20.

Not bad for not really changing any of your behavior, but how does it compare to my current system of using my credit-card rewards?

Bank of America WorldPoints Card

This card has lots of different ways you can redeem your points (magazine subscriptions, buying stuff from a catalog, travel, etc.), but I always take the cash. And that means calculating the return on my money is pretty straightforward. If you wait until you have 25,000 points (a dollar spent is a point earned), then you get a check for $250 cash. This is what I do, and so my return on the card is 1%.

I went back into my credit-card statements and calculated the average amount of money spent per month. It was $1,484. So,

And that’s UNREALIZED gain because you have to wait until you get into the 25,000 point range to get to a 1% return. Keep in mind, this is free money as long as you pay your balance in full every month and don’t incur any penalties or fees.

Recap

So that means that the program I’m using is netting me less than a program I have available to me, right? Technically, yes. But technically, Keep the Change isn’t free money. It’s my money and they are matching some of it. The free money I’m getting from them is the match, which for a year comes to $55.20, in which case the credit card beats it pretty good. This is kind of like the ING/savings rate debate of where to keep your money — I will keep my current system because changing the way I spend and save money isn’t worth the minor difference I would be getting back.

What do you think about these two programs? Do you use either of them and if so, which one do you prefer?

A few other things to keep in mind:

• If you have trouble resisting the temptation of credit cards, then it’s obvious you should go with Keep the Change.
• More on BofA’s Keep the Change program here, including a nifty little calculator tool that will give you an idea of how much you could be saving.
• In the end, the important thing is that you’re saving something and making it a habit
• I own shares of Bank of America stock, which doesn’t mean I’m promoting them, it just so happens I have accounts with them and own their stock. Grain of salt.

P.S. I should add here that this is NOT the way you should save money. You should set up an automatic pull from your checking to feed into an ING account or something like that. These two methods I’m discussing are only “bonus” or “extra” ways to save money. The way I see it, I use a card on everything, so I wanted to see which system gave me more bang for my style of spending. And now I know.

[this post has been included in the Festival of Frugality over at FIRE Finance. Make sure to check out the other articles. They aren't as good as this one, but they're decent enough]

This is one of those rare cases where a TV commercial brought me straight to the product’s website. Capital One had an on yesterday where a mad scientist was trying to “bring life” to his new creation (á la Frankenstein) but instead of a monster he was creating the perfect credit card.

I know, so tired, like all of their ads. But what the ad also got across was that users can add the specific reward features they want, á la carte. This is huge and it’s the first time I’ve ever come across it.

As someone who uses his card for everything, this kind of concept appeals to me.

I’ve played around on their site and, while the options aren’t that robust, it’s a very smart move to allow users this kind of flexibility. We’ve seen this succeed with Saturn and with Dell, so why not with credit cards?

One weird thing is that the site asks what credit level you are at to start things off, which is kind of silly because I don’t know how many people are going to be honest. But after that the reward options are pretty neat. If you pick certain reward levels (like 1.5% cash back on all purchases), other options get blacked out, which means you’ve used up your “permissions” to add more rewards to your card.

For example, I built a card with 1% cash back on all purchases but added a 25% annual bonus, so if I get $200 dollars back at the end of the year (which is my average with my current card, which returns at the same 1% level), I would get an extra $50. No annual fee and I can choose a 0% introductory APR.

The next step is adding an image to your card, which is cool but totally irrelevant in terms of finances. This may prove to be a major draw for some people though. You can pick from their predetermined images or you can upload your own.

Then you review what you’ve ordered and apply as you would any other card. It’s pretty cool and pretty intuitive. And for that, I have to say, “Well done.”

Now, if you have credit-card debt or have problems budgeting, please stay away from the site. It is NOT going to help you.

When I first started shopping around for a credit card with a good reward program, I was a little confused. There is a lot of fine print to wade through and they all have more footnotes than Infinite Jest. Since my budgeting system involves putting all my purchases on my credit card, it’s worth it for me to do my homework when picking a card.

Then I eventually found the card I have now: The Bank of America Worldpoints Card (formerly of MBNA fame). I get 1% cash back on all my purchases, no annual fees, and the great customer support that all BofA customers enjoy. Bank of American is also the bank I have my checking account with, which is just a coincidence but is certainly convenient.

I’m happy with the card and it’s myriad choices. You can use your rewards ($1 = 1 point) for purchases from their catalog, travel, VIP events, and even magazine subscriptions. But the best choice is and always has been cash (on average, my card pays me around $200/year this way).
Lately though, I’ve seen a lot of offers for cards that give 5% cash back on certain “everyday purchases” like at supermarkets, gasoline, and pharmacies. I don’t have a car but I do go to the supermarket every week and that has always tempted me to switch. I’ve always told myself the hassle wasn’t worth the switch.

Until (maybe) today. I am looking at the rewards for the American Express Blue Cash Card mentioned here and boy does it look good. You get 5% cash back on those “everyday purchases” while getting 1.5% on all other purchases*. So I’m maximizing all my returns by just switching to this card and maintaining my current budgeting routine.

Let’s estimate how much of a cash back I would get at the end of the year with this card:

-Old Card: around $20,000 charged at 1% = $200

-New Card: around $3500 in groceries at 5% = $175
around $500 in gas at 5% = $25
around $16,000 charged at 1.5% = $240
TOTAL = $440

That’s over twice as much as I was getting before! I guess all that’s left is to find out if American Express is accepted as widely as Master Card is.

Can anyone vouch for that?

*The catch is you have to spend over $6500 bucks/year, which I clear easily.