Citi Has A Strange Offer

I am a big fan of the reward cards that offer a minimum spend to get to a big reward.   It seems like a fair deal to me.   You give us your business, and we give you a reward.   For example, Citi’s American Airlines cards require a $750 in total spending before getting a 30,000 mile reward.      The latest offer from CitiBank is a strange twist on that.    This article points out that Citi is now offering to lower your interest rates if you spend $750 a month.

I think this is taking it a bit too far.   In my world, people paying credit card interest are, by my definition, spending too much.     They are inherently in over their heads.    Asking them to spend more to lower their interest rate is predatory.    On the face of it, most people of low to moderate income will spend at least $750 a month, so you could argue that Citi is just asking you to use their card over others.    Even that line of argument reminds me of tobacco companies defending their advertisements as just wanting people to switch brands, even as they placed ads in teen magazines.     The other problem is that if other companies start doing this, soon you will have a situation where someone could owe money on multiple cards, and they will have to go further into debt to reduce their credit card payments.

I love reward cards, yet I firmly believe that they are only for people who pay their bill in full every month.   I really think a line is crossed when you go from a reward based on a minimum spending amount to a lower interest rate based on a minimum monthly spend.   Shame on you CitiCard for implimenting predatory practices, even if they are not banned by CARD!

Better New From Chase

Chase has decided to end the mandatory binding arbitration clause in its cards.   This kind of arbitration is inherently unfair.    The original idea behind arbitration was that disputes could be resolved more quickly and less expensively in a private setting than in the courts.    Mandatory binding arbitration turns this upside down in that you have essentially given away your rights to an impartial judge, and now must submit to a very lopsided forum.      According to this article, “A congressional report in July said the National Arbitration Forum, a Minneapolis-based company that handled most debt arbitrations in the U.S., misled consumers and hid ties to collection firms. Companies won almost all the time, according to the American Arbitration Association.:

While this is seen as good news, it is akin to a reading a headline, “Man Stops Beating His Wife”.    Obviously it is bad news that this practice  ever occurred.    Worse, I have have seen no indication yet that other banks are following Chases lead, yet.

The Strangest Credit Card Ever

Finally, here is an odd article about a “credit card” that cannot be used to purchase anything.   It’s purpose is to be used as a utensil.    Granted, I have used credit cards to try to jimmy a locked door, or even to scrape ice off of a windshield, but I don’t imagine I will ever use one as an eating utensil.   The thing cost $12, about the same price as some decent cutlery!   I think it is sold for design, artistic, or novelty purposes.

Are you really so short on space that you can’t bring along a regular plastic utensil?     I would sooner slurp my soup or eat with my hands, thank you.

What Happens To Your Miles If You Pay Late?

I have previously talked about what happens to your points or miles when you cancel your credit card, or have you card canceled by your bank.     A separate but related question is what happens when you pay late.    In the past, just about all rewards were based on your spending.   Now that there is this credit crisis going on, and fewer people are actually paying their bills on time, if at all,  more credit card companies are doing the next logical thing; they are withholding rewards if you don’t pay your bill on time.    Here is an article over at ABC news about how Amex will be doing this on their Delta, Starwood, Hilton, and JetBlue cards.    The article really focuses on the fee they are charging to get your miles back.   The consumer groups they quote are outraged that there is another fee that the card companies are imposing.

I might surprise people, but I really have no problem with this policy or this fee.    I frequently mention that you have no business using reward cards if you cannot pay your bill in full, and you probably shouldn’t even have a credit card if you can’t pay your bill on time.    The rewards they give you are for being a good customer, and that cannot be said of you if you don’t pay your bill on time.    The fee to recover the reward is a bit silly.    Depending on your balance, it may or may not be worth it to recover the points.     At that time, you are just buying X number of points for X dollars.    The lateness really shouldn’t be a factor as to whether or not you choose to pay the fee.    The good news is that with these third party affiliate cards, once the points or miles are in your account, they are yours to keep.    Short of some sort of fraud, there is no way that Amex is going to take back your Hilton/JetBlue/Delta, or Starwood points that have already been deposited, no matter how bad your relationship with Amex becomes.    The same is most definitely not true for their Membership Rewards program, whose points only exist so long as you are a member, as the name implies.    If Amex decides they no longer wish to have you as a customer, the points disappear.

The End Of Rip Offs?

The blog over at the Mint website is speculating that the soon to be effective CARD act regulations will bring an end to credit card rip offs.    This is a fairly accurate, if optimistic look forward to next February, when we will get our first glimpse of the the world after CARD.  In reality, credit card companies will find other ways to rip us off, this bill just eliminates the most blatant and longest running scams going.    Some people thing that the aforementioned “restore your points” fee is a rip off.    It certainly will generate some new fees.     Here’s to hoping that credit card companies will try to earn their fees in honest ways.    My prediction has been that we will see more and more promotions that require a minimum spending amount, like X miles after X dollars spent in one year.    This will be a terrible incentive for some people to spend more, but at least it is more honest than having due dates on holidays, universal default, and double cycle billing.

Finally, The GOP is for higher APRs

I really don’t want to make this blog too political, but there is no way around the fact that the CARD act, which I love, was passed with the overwhelming support of the Democratic Congress and a Democratic president.    Now that the banks are jacking up interest rates in advance of it’s implementation, it is sadly unsurprising that the Republican party is doing everything in it’s power to block efforts to free credit card interest rates. I really hope that their opponents in the next election raise the issue that they voted for higher credit card interest rates.

CitiCard Churning

This is the process of applying for multiple cards in order to reap the sign up bonus.    For example, the American Airlines card offers 30,000 miles after your spend $750.    Unlike most cards, they do not prohibit you from taking advantage of this offer multiple times.    Some have gone so far as to receive dozens of sign up bonuses.    I can’t possibly mention this tactic without warning people that this is an extremely risky strategy from many, if not most people.   If having too many credit cards causes you to overspend, or even to not pay every bill on time and in full, do not even think about this.    The crackdown seems to be that CitiBank is no longer automatically accepting everyone all of the time.    Furthermore, there are rumors that the annual fee will not be waived for “new” cardholders starting next year.

US Mint Dollar Coins

The Mint has been offering dollar coins for face value with free shipping for some time.  There is a series of Presidential dollar coins, as well as one commemorating Native Americans.    It has been possible to order these coins on your credit card, and to deposit them in your bank account, reaping the miles or cash back.    Recently, a notice was placed on the web site indicating that these transactions may be counted as cash advances, whereas before they were processed as purchases.   Also, some people received a letter saying  that people were abusing the program buy purchasing these coins with intentions other than circulation.    There were no threats in the letter, as this practice is perfectly legal in every way, but it was an ominous sign that someone, somewhere was not happy with this practice.    Others have pointed out that credit card companies are entitled to code any transaction the way they want to, the Mint has no control.   Furthermore, one can request that their credit card company turn off the option for cash advances, or set the maximum amount to zero.   In this instance, it should be impossible to process a coin order, if you credit card company decides it is really a cash advance.

Chase British Airways Deal

I have written about this deal that not only offers 100,000 British Airways miles as a signup bonus, but also offers a free companion award ticket after $30,000 annual spending in a calendar year.   This is a great deal, but they are not accepting a lot of people who normally get any credit card they apply for.    This seems to be one of the most restrictive offers out there, with rejections going to people with high credit scores, but a few too many recent inquiries on their credit report.    It is not known how long the 100,000 bonus mile “limited time” offer will be around, although the terms of the companion ticket seem to assume that that offer is a long term deal.

What Does This Mean?

People who read a lot of mainstream press reports will see this as a sign that the credit card companies are truly being forced to limit reward cards in anticipation of the CARD Act becoming effective.    I don’t buy it.   If that were true, why would Chase and British Airways be offering a new credit card with unprecedented rewards?    There is no indication that Citi will stop offering reward cards, just that it is beginning the process of closing an existing loophole.   This is sad for those who have been successful in exploiting it, but seasoned reward card veterans will recognize this is part of the life cycle of a deal.   A loophole or any other great deal is initially discovered and revealed on messageboards like FlyerTalk, or travel and credit blogs, like this one.   As people exploit it, the deal becomes more and more popular.  Eventually, someone at the credit card industry notices the problem, and ultimately makes some change to close the loophole.  Sometimes this process takes years, as the CitiBank churning strategy has been around for several years now.    Other times, the cycle takes days, like the “Big Delta Promo” last year that supposedly was not supposed to exist in the first place.  In the case of a airfare misprint, the cycle can take hours or even minutes from discovery until shutdown.  This is the natural cycle, and it is continuing to this day.   There is no sign that these deals are disappearing forever.    I am confident that there will always be a new deal on the horizon.

The important thing is to be prepared for these deals.   Keep a high credit score by paying all of your bills on time.    Keep a low utilization rate, that is spend far less that your availible credit.   Keep a few cards for a long time.   Having a longer average credit history helps your score.  The most important thing is to always pay each bill in full; never pay interest on your credit cards.    As I have said, many, many times, if you pay interest, you should not even be in the reward card game at all.   If you have an outstanding balance, your only priority should be paying that off, and find a credit card with the lowest interest rate to help you do so.    Reward cards will incent you to spend more, and they do not have the lowest interest rates.

Follow these simple rules, and you will be ready to pounce at the next great deal.

Anyways, author Megan McArdle attended Dave Ramsey’s seminar, and even gave his methodology a test.   Her results were fairly positive.     Now, I haven’t attended one of his seminars or read his books, so I will be relying on her experiences.

The Philosophy

Ramsey truly hates debt.    He preaches giving up credit cards and all other forms of debt, with the exception of a 15 year home mortgage.    One of the things that I did not know about him, was that he is very similar to an evangelist.    He quotes extensively from the bible, and McArdle compares his meetings to a prayer meeting.    His methodology is to withdraw all of the money you will spend in a month, and put them in envelopes.    In this way it is thought that you will spend less money.

My Take

It is hard not to agree with Ramsey’s goals.    We agree that almost all debt is bad.   To me, credit card debt is one step better than pay day loans, but not by much.      I also tell people to avoid debt on just about all depreciating assets, especially cars.    On the other hand, I don’t have that much problem with debt on appreciating assets like your home or your education.    Sure, we just passed through a very short, unique period where home prices underwent a correction, however over the long term, homes do appreciate in value quite reliably.

Where Ramsey and I disagree is in both our methodology of reaching the debt free goal, and our approach to promoting our philosophy.   Dave would have you cut up your credit cards, as the picture in the article clearly shows.   I personally feel that the benefits of using a credit card as a method of payment outweigh the psychological risk of overspending.   For many people, Ramsey’s advice makes sense, as they have used their credit cards as a method of financing purchases they cannot afford to pay in full at the end of the month.   There is the key difference between method of finance and method of payment. People like myself who use credit cards as a method of payment, pay their bill in full every month.   They use other means to budget their money.   If you ever find yourself tempted to use your card as a method of finance, Ramsey’s all cash solution is a reliable, if brute force method of kicking that habit.

When I say that the benefits of credit cards outweigh their risks, what am I talking about?    First, when cash is lost or stolen, it is gone forever.    When your credit card is lost or stolen, you loose nothing.   My house was burglarized recently, yet little was taken.   The police pointed out that they were almost certainly just looking for cash.   They didn’t find any as the only cash I ever have is in my wallet.    I also enjoy the charge back ability of a credit card.    Frequently, just the threat of a charge back is enough to convince a merchant that they should do the right thing.    Of course, the cash back rewards don’t hurt.    I am saving 2% or more on everything, all of the time.   That really adds up over the course of a lifetime.   Finally, credit cards simplify my finances.   I know when my payment is due, I don’t have to worry about each withdrawal and each check, as the money comes out of my bank account in one payment to cover many expenses.

The other big difference between Ramsey and I is how we get across our message.   McArdle paid $220 for front row seats to hear him speak, while you can read my blog posts for free.   Frankly, I have a hard time trusting anyone who would thinks it is a good idea to shell out that kind of money for a financial lecture.   Another huge difference is that Ramsey is giving his advice in a highly religious context.   According to McArdle, most of his attendees are evangelical Christians, and his talk concludes with a plea to get to know Jesus.

It so happens that I myself am not a Christian, but I do have the utmost respect for Christians and their faith.   That said, I just don’t see the point in mixing religion and personal finance.   I don’t pretend to have any crucial insights into spirituality, just some good advice on how to use credit cards for your economic benefit.    I like to think that my advice applies equally to people of all faiths, or of none.    I am not sure Ramsey can make the same claim.

I will, however,  conclude with a religious analogy.   It is said that different religions are just different paths to the same truth, or different ways of worshiping the same god.    Likewise, Dave Ramsey’s method of achieving financial security and independence, like his religion,  is different than mine, yet I think that in the end we both share the same goals.

Another illustration would be Wal-Mart vs. Costco.   Wal Mart does have very low prices.    They do this by paying their employees poorly and offering them few benefits and notorious working conditions.   As a result, the personnel I have encountered there are not motivated to assist you and are indifferent to customer satisfaction.   Furthermore, most of the merchandise they sell are low quality products imported from China.   On the other hand, Costco is well known for being one of the nation’s best employers.   They pay their employees above average wages for the retail sector, and offer great benefits.  In return, they retain employees a long time.    This means that they are more efficient and have superior knowledge of their responsibilities.  Their prices may not be quite as low as Wal-Mart’s, but their employees are courteous, helpful, and don’t seem to hate their job.    Sure, many of their products are Chinese imports as well, but there are a lot more quality name brands than at Wal Mart.

I choose to patronize Costco not just because they treat their employees better, but because their employees treat me better.    I have a better experience when I go to Costco, and I know that they are committed to customer satisfaction.    Wal-Mart is like a Yugo, while Costco is like my trusty Subaru, they never let me down.

Look For Customer Satisfaction Guarantees

Some businesses guarantee customer satisfaction.    Costco will take just about anything back, with or without a receipt.   Other examples of companies with iron-clad satisfaction guarantees include REI and Performance bicycle shop.  When you buy quality products from retailers who will stand behind them, you are being frugal even if it occasionally costs slightly more.

The same philosophy works with financial services.  I do my banking with a small, internet based bank.   I chose this bank because they rated highly on customer satisfaction surveys.   They keep their costs down by not having branches all over town.    Instead, they provide first rate customer service over the phone with live human beings based here in the United States.    They charge few, if any fees, and even refund the ATM fees that other banks may charge me.

This Works For Credit Cards Too

You might get some great rewards from your credit card occasionally, but some companies just don’t have their customer service act together.    When I had some cards stolen from my house two months ago, I was able to fix all of the problems with one phone call to one credit card company.   I am still dealing with fraudulent charges from another company, two months later.    Guess which card I will be keeping?

Another example is with reward partners.   Like most travel and reward card bloggers, I am devoted to the American Express Starwood Preferred Guest program.    On the rare occasion that I have had any problem with the card, their website, or even their hotels, I have received a prompt resolution that has been more than adequate.    They do not devalue their program periodically, at least not nearly to the extent that most other programs do (I am looking at you Hilton!).   They also don’t withhold points on discounted stays, like the Intercontinental Hotels Group (Holiday Inn) does.

Bottom Line

I frequently mention that your credit card is not a lifetime relationship.   I also like to remind my readers that the credit card market remains extremely competitive for people with decent credit.   The evidence is as clear as the offers that litter everyone’s mailbox.     On the other hand, it is a good feeling when you find a product or service that delivers real value.    That value is a quality product or service.    When it is coupled with a competitive price, you actually have a frugal choice, even if it is not “the cheapest.”

As any wise reward credit card holder knows, credit cards are a financial instrument that is kept only so long as they are useful; they are not a lifetime commitment.    That begs the question, where do my Miles, Points, or Cash back rewards go when I cancel my credit card?

The Three Different Types Of Reward Systems

I can break every reward card down into three different types.

The first is cash back cards. They seems simple compared to other complicated miles and points programs, but there are several different ways that a cash back card can determine the disposition of your rewards.     Many cash back cards give you a check or a statement credit every month.    Others dole out your rewards when a threshold is met.   There are some that give out rewards annually, based on either the calendar year, or your sign up anniversary. Finally, some popular cards have a sort of hybrid scheme.  My Capitol One card is one of those hybrid cash back cards.   I get 1% cash back monthly, but I only see the statement credit when I reach $25 in cash back.     It is my assumption that should I cancel the card, I would get the remaining fraction returned on my last statement.   In addition, I also get another .25 percent back at the end of the year.   The Costco Amex, on the other hand,  is infamous for giving out cash back on an annual basis, every February.   The problem is that if you cancel your card before February, or even if they cancel you, you loose out on an entire year’s reward, which could be hundreds of dollars.

The second type of reward card gives out bank created points. These loyalty programs, like American Express’s Membership Rewards are created and run by the company issuing the credit card.    Each is different, but the general idea is that the bank itself can grant, withhold, or even subtract rewards from your balance, in accordance with it’s program’s terms and conditions.    Those terms and conditions are subject to change at a moment’s notice as well.    My understanding is that if you cancel all of your Membership Rewards credit cards, you loose all of your points.   In other situations, these bank run reward systems withhold points if you are late with your payment, or they may freeze your account altogether.    You will have to do the research yourself to become familiar with your bank’s rules and regulations.

The third type of system is one I think of as a third party affiliate card. A good example is the American Express Starwood Preferred Guest card.     Every month when my statement closes, I get a direct deposit from American Express of Starwood points to my Starwood account.   From that moment on, those points are mine alone, and Amex has no power to touch them.    The same is true of Delta miles accumulated with the Delta Amex or American Airlines miles earned through a CitiBank card.

Which System Is Best?

The Cash Back cards are pretty foolproof, so long as you don’t get heavily invested in an annual return that is based on your membership at some point in the future.   The Costco card is fairly competitive, but I really don’t want my cash being withheld until February of 2011 from purchases I make this January.   In the best case scenario, they are keeping my money for over a year.    In the worst eventuality, they could arbitrarily decide to cancel my card at the end of the year, and I forfeit everything.    Let’s just say I am not interested in leaving a few hundred dollars up to the whim of American Express and Costco.

I am not too excited about bank sponsored loyalty programs either.   It is not that I am worried about my account not being in good standing, it is just that they usually provide less valuable rewards than third party loyalty cards.   This is because the third party, like an airline or hotel chain, is able to offer rewards from excess inventory at very low cost to themselves, while they count on card holders to be more loyal to their brand with their purchases.    It is that higher rate of return, along with the irrevocable reward points and miles that makes me a big fan of third party reward cards like the Starwood Preferred guest Amex.

Gaming The System

Some have discovered that you can cancel your credit card within thirty days of the annual fee and have that fee refunded.   There are even some who have reaped bonus points, only to later cancel their card.     I find this a little ethically dubious.    I have never done it, and I suspect there are only a few cards in which you can get the sign up bonus, and then cancel the card with a refund of the annual fee.   I am torn.   Part of me thinks that this is the kind of loophole that banks always exploit when it is in their favor, while the other part of me really doesn’t want to play at that level.

What do you think?

Appeal A Rejection

As someone who pays all my cards in full every month, I maintain some pretty good credit.    Naturally, I don’t receive rejection from applications that often.    On the other hand, credit has been tightening, and more people are getting rejected now than ever before.     It turns out that the rejection letter may not be final.    Richard Ingersoll over at Frugal Travel Guy blog has had some success with reconsideration letters. The idea is not that you are providing any new information, but that you are restating your case, potentially to a human being rather than a computer.     I fully expect to be approved for the British Airways Bombshell offer, but if I don’t for any reason, I will definitely give the reconsideration letter a try.

Reallocate Your Credit

Gary Leff over at the View From The Wing Blog points out that American Express is now allowing card holders to shift some of their credit from one card to another.   Apparently, they had previously allowed this at some point, and then stopped doing so.     The idea is that you can have more credit on the card that you use the most.     Gary points out that he had been approved for a particular reward card, but at a very low limit.   Later, he wished to take advantage of a promotion, but couldn’t due to the low limit.   He was then able to shift his available credit from one Amex to another.    I have read lots of stories about people doing this with CitiBank cards as well.    This is a very little known trick that you can keep in the back of your pocket for some time in the future that you may need it.

I have seen this phenomenon before, sort of.   Years ago, when I had a roommate, we used to split our utility bills half and half.   Inevitably, we both rounded an odd number down to the next cent.    One day I got a bill for an outstanding balance of $0.01.    We had the greatest time calling the company up and telling them we couldn’t come up with the money, and would like to pay in installments!

Personally, I can’t really think of a way around this.   If they did not send out checks, then they would be accused of profiting in small increments, like in the movies Superman III and Office Space.

What do you think, should I frame it?

That was last November.    Now this November, Chase and British Airways may top that offer.    Here is the deal.    To break it down, you get 50,000 miles for signing up, another 50,000 miles after your first $2,000 spent within the first three months of the account.    That is 100,000 points for just $2,000 dollar spent, (50 miles per dollar) but we are just getting started.

Spend $30,000 in a calendar year, and you will get a companion award ticket.   This is not a companion ticket good at some paid fare class equal to twice the regular fare, it is an actual free companion award, valid when you redeem any award in any cabin.    Note that British Airways usually operates four cabin aircraft for long haul flights including economy, premium economy, business, and first classes.   For comparison, Delta and Continental only offer two class service, with United, American, and US Airways offering three class.

What You Could Do With This

Gary Leff at the View From the Wing blog and Richard Ingersoll at the Frugal Travel Guy blog are both all over this one.    The theory is that a couple could each get the card, spend $32,000 over the next year, and end up with the equivalent of 480,000 miles, or two first class tickets from LA to Dubai.

Wait One Second

This offer does seem a bit too good to be true, and there are some major catches that Gary and Richard don’t bring up.    I however, started a thread over at FlyerTalk with some real British Airways frequent flier gurus to find out what it would really cost.   I used my “falafel run” from Denver to Tel Aviv, via London as my reference point to how I could use this deal.

In the end, I found out that my family of three would pay nearly $2,000 in fuel surcharges alone on three business class tickets Denver-London-Tel Aviv round trip, about $700 each.     the $32,000 spend also carried an opportunity cost of $640 in rewards had I spent that sum on a %2 cash back card such as Schwab Bank.   There is also a $79 annual fee per card that is not waived the first year.

So the tickets would hardly be free, but the forum members pointed out some real benefits.  First, British Airways awards are reasonably available, unlike say, United.    Also, they do not have multiple tiers like Delta, with the lowest tier being almost completely unavailible.    They are  partners with American Airlines and other OneWorld Carriers, although the companion certificate is only good on British Awards.      Another plus is that British Airways awards are flexible; they can be rebooked on different dates along the same routing for free, and a London stopover is also free.   Another factor is that British allows families to pool miles with household accounts, a really nice feature.   Finally, I discovered that lap child award tickets are available for %10 of the mileage of the parent’s award ticket.   Other airlines have outrageous policies where lap infants traveling with their parents are charged 10% of the highest fare class they can come up with, often more than the price of a coach seat!    This could be a factor considering that it may take over a year to get to the 30,000 mile annual spend, and we may then plan the trip nearly a year in advance to get the dates we want.  If that is the case, it would not be the first time we booked a ticket for a member of our family not yet born at the time.

Unknown Factors

There is another rather lengthy discussion thread on the merits of this deal at FlyerTalk in which it is pointed out that this deal may flood the North American market with BA miles and companion certificates, reducing the once reasonable award availability.      That is certainly a risk.    Another risk is that BA may decide to change it’s redemption policies between now and when I might eventually redeem an award.   As I have said, if I do this, it will be a long term project.   I might apply for the cards now, get the companion certificates in a year, and book travel for some time in 2011 or even 2012 at the earliest.    Who knows what can happen between now and then?

For many this deal will be a no brainer.   If it all works, this could be the biggest credit card deal of the year.    I just hope they don’t pull the deal before people have had a chance to jump at, as what happened with the Delta deal last year.