Tips On How To Cancel A Credit Card… Profitably!

Posted on October 3, 2007 // 33 Comments

You may have already heard from me and other articles that canceling a credit card does not help your credit score. But sometimes, you just have to do it. For example, you may have an annual fee or some ongoing customer service nightmare.

What’s happens to my credit score if I cancel? While it won’t help my credit score, it likely also won’t hurt it very much either. As explored previously, the two factors that matter are credit limit utilization and average age of accounts. As long as this card doesn’t comprise a huge chunk of your total available credit limits, it shouldn’t affect your utilization ratio very much. In my case, this AmEx Gold card is a charge card and doesn’t even have a credit limit, so it won’t matter at all. As for the average age of accounts – your account is already opened! Closing it won’t make it any older.

Still want to cancel? Here are some tips to keep in mind:

#1 Consider simply switching to another type of card with better features or annual fees.
If the reason for closing the card is to avoid paying an annual fee, perhaps try to simply convert the card to another style offered by the same issuer. For example, I could ask to be transferred to a card which has no annual fee. They might say yes, they might say no, but it’s worth a try.

For example, the more heavily-pushed Citi Platinum American Airlines Card has an annual fee of $50, but the lesser-known Citi Bronze American Airlines Card has no annual fee (albeit with less rewards). So instead of canceling your platinum card, you could just convert it to a less valuable metal but still be able to earn a few quick miles when needed.

#2 Combine the credit limits with another existing credit card.
Similar to above, you can simply try to “move” your credit limit from the card you want to cancel onto another existing card you want to keep (within the same issuer.) This way, you can get rid of one card while keeping your nice credit limit and maintaining your credit score.

#3 Go fishing for some financial encouragement to stay
When you call to cancel, you will usually be transferred to a special person trained to handle cancellations. This may also be referred to as the “Retention”, “Loyalty”, or “Member Relations” department. The primary goal of this person is to keep you a customer, using whatever means at their disposal.

Accordingly, your goal here is to find out what they have to offer you. First of all, be nice! Help them to help you. Instead of asking sternly to cancel, you might say something like “I am thinking of canceling because my interest rate is too high.” This would encourage the rep to offer you a lower interest rate. For my situation, I might say something like “I don’t like this card enough to pay $125 next year, it seems a bit steep”. Ideally, this would lead to something like a $100 credit to stay, another annual fee waiver, or some other financial incentive. They may have a variety of things in their goodie bag, and it may change from time-to-time due to quotas or whatever.

I usually call early, usually as soon as I get the sign-up bonus and I know there are no other redeeming features. For example, I have been offered a $25 gift card to stay another 3 months by Discover. After that time period passes, I can call again.

#4 Sometimes you’ll just get lucky
One time while canceling another American Express credit card, I just didn’t like what they had to offer and simply canceled. To my surprise, I got a pro-rated refund of the remaining part of my waived annual fee with my final statement! Out of the $90 fee which I didn’t have to pay, I got a $63 credit. The only takeaway here is that if you really want to cancel, just go ahead and do it. If I had waited until the last moment, my prorated annual fee would have been just a few dollars.

Filed Under: Credit Cards //

Chase Freedom Cash Visa: 5% Back On Popular Spending Categories

Posted on September 24, 2007 // 44 Comments

Filed Under: Credit Cards, Deals & Offers //

Cash Back On All Purchases With Citibank CashReturns MasterCard

Posted on September 13, 2007 // 67 Comments

There is yet another rewards card variation out there – the Citibank CashReturns MasterCard.

What’s special about this card is the promotional offer. It offers 5% back on all purchases for 3 months.(Update: as of 4/20, it only offers a 20% bonus on the standard 1% back on everything), with no caps or limits. This would be ideal for those that either regularly charge high amounts on their cards, or have any large purchases coming up. Got a home improvement project approaching? Christmas gifts? Vacation plans? Reimbursed work expenses? I know we really racked up the charges when we moved.

Doing the math, this has the potential to be better than any of the other sign-up bonuses out there. If you get 5% back on $10,000 during the intro period, that’s $500 of tax-free cash in your pocket! (Why credit card rebates are believed to be non-taxable).

The standard benefits are pretty average, but do offer more towards simplicity:

» Earn 1% cash back on all purchases
» No limits or expiration on the amount of cash back earned
» Checks sent automatically upon earning $50
» No Annual Fee

Update: Yes, there is also 0% APR on balance transfers for up to 12 months with this card, but note that it comes with a transaction fee of 3.0% of the amount of each balance transfer ($5 minimum). If this is what interest you, see this list for alternative cards with no initial balance transfer fees.

Filed Under: Credit Cards, Deals & Offers //

Can Having Too Many Credit Cards Hurt Your Credit Score?

Posted on August 28, 2007 // 59 Comments

I got three e-mails with this same question yesterday! Mostly, people want to either participate in balance transfer arbitrage or grab a few new rewards cards.

To start off, we must realize that all credit scores are based on secret formulas, supposedly generated by supercomputers and mountains of data to accurately predict our creditworthiness. This results in companies like FICO never truly revealing the ingredients to the secret sauce, otherwise we could just do it ourselves and they’d have nothing to sell.

fico data turned into fico scores

In other words, nobody truly knows the answer. Now, I have never read anything official that specifically listed “number of credit cards” as a negative factor in scoring. We can only examine what they have revealed and try to read between the lines. For example, FICO has previously released this breakdown:

image altered from original in wikipedia: http://en.wikipedia.org/wiki/Credit_score

Some of these aren’t related at all to the number of credit cards you have, such as “on-time payments” and “mix of credit used”.

Capacity used – This simply means how much of your available credit you are using, sometimes referred to as utilization ratio. If you’re maxed out on all your cards, obviously that’s not a good sign. If anything, having more credit cards would mean more available credit would lower this your utilization ratio and be a good thing. Now, individual creditors might balk at someone having too much available credit, but it doesn’t appear to factor into the FICO score.

Length of credit history and past credit applications – To be specific, not the only length of your oldest line, but also the average age of all your accounts matters. Continuously opening new credit lines will hurt your credit score. At the same time, having a lot of old cards can “anchor” your average account age as well. For example, if I already have 20 cards averaging 7 years old, adding another new credit card won’t make that average budge hardly at all. Again, we see that if anything, having a lot of cards might actually be helpful. (This is why I also don’t cancel credit cards unless it’s profitable to do so.) However, opening a bunch of cards all at once is also an indicator of desperation, so I limit myself to about 3-5 credit cards per rolling 6-month period (for profit and more profit).

Another source of information is the FICO Score Estimator from myFICO. Here, how many credit cards you have is the first question asked! Uh-oh. But again, I think the first two questions mainly help determine your average account age. It’s also a filter as you need at least one card that is 6 months old for the estimator to work. If you look at all 10 questions you’ll see many parallels with the pie chart factors.

Finally, there is personal experience. I have over 20 credit cards (average is ~10 per consumer) and have seen no indication that having too many credit cards makes my score any lower. When not in 0% debt, my score is excellent. Therefore, if you ask me, having too many credit cards may give people too much temptation or too much clutter, but based on the evidence available I don’t believe that having too many cards by itself lowers one’s credit scores.

Filed Under: Credit Cards //

Make Money From Credit Cards: 0% Balance Transfer Profit Calculator Tool

Posted on August 9, 2007 // 65 Comments

My series of articles on How To Make “Free” Money From 0% APR Balance Transfers has been very popular and many readers have also jumped in. Despite the risks, I’m still happily earning some money from the credit card companies for a change, and haven’t missed any payments. From the beginning, people have asked me to make a spreadsheet or calculator in order to estimate the potential profit from such endeavors. I initially decided against doing so because there are lots of different variables at stake that make an exact prediction close to impossible. However, I think it may still be useful to obtain some more realistic numbers.

Without further ado, I present to you the…

0% Balance Transfer Profit Calculator

Enter savings account APY: %
Enter starting balance: $
Enter the monthly minimum payment percentage (2%) %
Your interest earned:   $
(See assumptions and definitions below)

Inputs and Definitions

  1. Arbitraged Interest Rate (APY) – Where are you putting the money you’re borrowing for free? This is the interest rate of the investment vehicle (savings account, CD, Treasury bond) you are using, or perhaps the interest rate of the existing loan (car, home equity, student) that you are paying down.
  2. Starting Balance (dollars) – How much money are you transferring?
  3. Monthly Minimum Payment (%) – Usually you must still make a monthly minimum payment on the outstanding balance during the 0% period, which will decrease your profit potential slightly. This is usually around 2%, but may vary between 1.5% and 4%.

Assumptions

  1. The balance transfer is for 12 months at 0% APR, with no balance transfer fee. You can find my list of the best 0% APR offers here with low or no balance transfer fees here.
  2. The interest is assumed to compound monthly, which allows me to convert from APY to APR, and then to a periodic rate. Compounding frequency is a variable here, but doesn’t change the numbers too much.
  3. I am ignoring the time required to actually convert the balance transfer into cash earning interest. Sometimes this can take up to a few weeks, sometimes it is much faster. Instead of guessing, I just leave it be.
  4. I am also ignoring things like grace periods and the timing of statement cycles and due dates, which can actually increase the time that your borrowed money is earning interest, and thus your profit.
  5. If you are earning interest in a taxable bank account, you will likely owe income tax on that interest at your marginal rate. This is not accounted for in the calculator, but is a simple calculation.

(If you’re confused about what I am talking about, please refer to the tutorial mentioned above.)

Example Profit Calculation
Let’s say you obtain $15,000 and place it in a bank account paying 5.25% APY, with a 2% monthly payment. Using our assumptions, the 5.25% APY is equivalent to 5.13% APR, or earning 0.4273% of the balance each month.

Beginning of Month #1: You have $15,000 in the bank. Total balance left on credit card: $15,000. Nothing is due yet.
End of Month #1: You earn $64.10 in interest, but also need to pay back $300 (2% of $15,000) out of your bank balance for the minimum payment.

Beginning of Month #2: Total in bank:$14,764.10. Total balance left on credit card: $14,700.
End of Month #2: You earn $63.09 in interest, but also need to pay back $294 (2% of 14,700).

This continues for 12 months, as shown below:

altext

At the end of the 12th month, your bank balance is $12,477.87, and you still owe $11,770.75 on the card. You pay it off completely, leaving you with the resulting estimated profit of $707.12.

Play around with the calculator. Some people actually have over $100,000 out at once, earning them thousands of dollars a year. My credit limits aren’t quite that high…. yet!

Filed Under: Credit Cards, Deals & Offers, Tools & Calculators //

Reader Question: Pay Off Credit Cards vs. Invest Your Money?

Posted on July 25, 2007 // 49 Comments

I’ve gotten a few variations of this question recently:

I’ve only got about $5,000 in savings and about $4,000 in credit card debt. I’m not sure if I should pay off my cards first before I decide to invest or what. I’m just looking for a way to make my money work harder. – Michael, New Investor

I indirectly addressed this topic in my post titled You Have Some Money. Where Do You Put It?, where the my top 4 were listed as:

  1. Invest in your 401(k), if you have one, up until the match.
  2. Pay down your high-interest credit card debt.
  3. Create an emergency fund with at least 2 months.
  4. Fully fund your Roth IRA.

If you read through the many thoughtful follow-up comments, you’ll see that many people have differing views on this. I’ll try to clarify my own positions here, but although I will try to provide good reasons behind then, I do agree that this is all very subjective. As usual, the ultimate goal is to present all the arguments in order to help everyone better determine their own personal solution.

#1 Invest in your 401(k), if you have one, up until the match.
Many employers offer matching 401(k) contributions. So if you contribute $100 from your paycheck, your employer will also chip in $50-$100. This is an instant 50-100% return… Some would even call this free money! Unless your credit card interest rates are over 50%, mathematically you are ahead by far. In addition, you have now started your nest egg for retirement.

Exception: The benefit of this match gets a little hazy as often you have to work for a number of years before the matched amount “vests”, or officially becomes yours. You may never actually get to keep much of the match if you only work for a year or two, so take your long-term prospects into account.

#2 Pay down your high-interest credit card debt.
Here we reach one critical debate: Paying Down Debt vs. Roth IRA. On one side, we have high interest (say, over 8% right now) debt. On the other, we have the opportunity for tax-free growth.

My argument here is, again, simple math. If on one hand you have money in stocks growing (maybe) at 10% tax-free, and on the other hand you have money shrinking at 18% with no tax deductions, you’re still losing money! Therefore, I feel the best general decision is put all that money towards your debt. Yes, saving now may mean much larger balances later, but remember, here you are choosing one or the other here, and not paying off the credit cards puts you behind.

The counterargument to this is that you only get to put in $4,000 in a Roth every year and that is precious. You can’t put nothing in this year and $8,000 next year. If you are sure that your tax rate to be higher in retirement than now, and you don’t expect to have access to other similar options like a Roth 401(k) or 403(b) in the future, then I can see how putting money towards the Roth may be better.

(Now that I think of it, another reason might be that Roth IRAs are protected in case you decide to wipe out all your credit card debt in bankruptcy court…)

Exception: One should always try to lower their interest rates if possible by calling the credit card issuers directly or, if your credit is high enough, try to get a low interest balance transfer onto another card.

#3 Create an emergency fund with at least 2 months.
Here is another hard question: Where does an emergency fund play into all of this? Overall, I think people should pay down their high-interest debts as much as possible before saving up 6-12 months of emergency funds.

Why? For one thing, if an emergency does occur, many expenses can be simply be put back onto those same credit cards: utilities, food, clothing, medical bills, etc. Other things like rent can be paid via cash advance. Since it’s most likely an emergency won’t occur, you’ll be saving a lot of interest by paying off the high-interest debt now.

The reason I put 2 months down is because I wanted to designate this a “barebones” emergency fund. The actual amount needed depends heavily on the individual: How stable is your job? Do you have disability insurance? Would your parents or someone else bail you out?

Fully fund your Roth IRA.
Although you can withdraw your contributions out of a Roth if you need to, the Roth should be a last resort. Therefore, you have the “barebones” emergency fund first, and then the Roth IRA. Should a Roth be above even a barebones emergency fund? That’s a judgment call. In my mind, a barebones emergency fund is maybe $2,000. Otherwise, you’re literally living paycheck-to-paycheck, during which I would worry about now first before the future and Roth IRAs.

Exceptions: As noted earlier, the Roth IRA is really only better than a Traditional IRA or 401k if you expect your marginal tax rate to be higher in retirement than when you make your contributions. If you expect them to be the same, they are essentially equal, with the Roth taking perhaps a slight edge. Here’s the math showing why… Say you have $10,000 pre-tax income to contribute, 25% marginal income tax rate both now and in retirement, 8% annual return, and a 30 year horizon.

401k (pay tax later):
( 10,000 x 1.08^30 ) [compounding] x ( 1 – .25%[tax later] ) = $75,469

Roth (pay tax now):
( 10,000 x ( 1 – .25%[tax now] ) )x (1.08^30) [compounding] = $75,469

If your tax now > tax later, the 401k comes out ahead. If tax now < tax later, the Roth wins. Please share your thoughts in the comments, if I haven't confused you completely already...

Filed Under: Credit Cards, Investing //

Updates on the American Express Gold Card 25,000 Mile Bonus Offer

Posted on July 18, 2007 // 25 Comments

The New Business Gold Rewards Card from American Express Image

Update: The below promotion is now expired. The New Business Gold Rewards Card® from American Express OPEN now offers 3X points on airfare, 2X points on advertising, gas, and shipping and 1X point on everything else. The annual fee for this card is $175 but it is waived for all new cardholders. You can also get unlimited additional gold cards for an extra annual fee of $50 but this fee is waived for the first year as well.

I finally got around to opening some mail today and saw that my New Business Gold Rewards Card® from American Express OPEN arrived. I had almost forgotten I had applied for it in the whole move. (I convinced my wife to apply as we could really use the 25,000 Membership Reward sign-up bonus as frequent flier miles.)

As has been reported by other readers, the paperwork that came with it only mentions a bonus of 5,000 points after the first purchase and another 20,000 after spending $50,000. I really wanted to get to the bottom of this, so I called American Express and talked with multiple reps about the bonus. I explained to them that the wording is very clear, I have the specific bonus code, and is the offer still up after more than two weeks, so it is clearly not some unintentional misprint:

Upon the Basic Cardmember’s first purchase, a one time bonus of 25,000 points can be earned toward the Basic Business Gold Rewards Cardmember’s Membership Rewards? account and may appear as separate credits of 5,000 and 20,000 bonus points.

Most of the reps seemed like robots and just sounded confused as this wasn’t on one of their scripts, so I just ended the call quickly in that case. But two of them were familiar with this promotion, and said that they had already fielded several calls about it. The summary:

1. The same paperwork goes out to everybody, and what is mentioned is the standard, older promotion. This doesn’t mean you won’t get the 25,000 points, as this special promotion does exist and is valid.
2. The problem is that they can’t tell on their computers which promotion you signed up for. However, it should be tracked in their systems internally if you used the right link. I would keep a print-out of your page. If you want, you can call them and ask them to note specifically the Bonus ID 2329 on your account, which may help you dispute if anything does happen later.
4. Otherwise, there is really nothing you can do right now. Personally, I am confident that they will come through, as I have already scored $100 + 5,000 miles from the same card last year, and in that case nothing about any bonus was mentioned in the paperwork that came with the card! I’m just going to make my first purchase quickly, tuck it away, and wait the 6-8 weeks.

Filed Under: Credit Cards, Deals & Offers //

LifeLock Review: DIY and Protect Your Identity For Free

Posted on July 4, 2007 // 33 Comments

You’ve probably seen commercials for a service called LifeLock, which offers identity theft protection services ranging from $10 to $30 a month. After a $12 million settlement with the FTC over deceptive marketing practices, they are again in trouble with the FTC over… their deceptive marketing practices. The main problem that I have with this service is that they are charging you for things you could do yourself, and often you will have to do it yourself even if you pay them.

Here’s what they used to say:

First, we ask the credit bureaus to set fraud alerts on your behalf. Usually, this is done through our automated systems and the alerts are set within an hour. From time to time there may be a hitch and we have to do the first one manually, usually because they have a different address on file for you. If this happens, we’ll tell you right away and do what needs to be done to get the alerts set.

Since then, I believe the credit bureaus have gotten angry at Lifelock (making money off of your data is their job!) and now you have to set the credit freezes yourself.

Free – Just call the numbers below. Technically, alerting any single bureau should automatically initiate fraud alerts on all of them, but it may be more reliable to simply call each one separately.

* Equifax: 800-685-1111; Fraud Dept. 800-525-6285
* Experian: 888-397-3742 (same for Fraud Dept.)
* Trans Union: 800-916-8800; Fraud Dept. 800-680-7289

I should note that this will also hinder your ability to get quick approvals for things like auto loans or credit card applications. One good tip is to use your cell phone as the contact number so that the bureaus can quickly verify your identity when you really do want to apply for credit.

Second, unless your circumstances change and you tell us not to, every 90 days or so we ask the credit bureaus to do it again.

Free – Use Google Calendar (also free) to e-mail you a reminder to call again in 90 days. Rinse and repeat.

Third, we request that your name be removed from pre-approved credit card and junk mail lists and we keep making the requests as they expire. Statistics show that this is one of the most common ways that thieves hijack identities. Plus, all that mail is just so irritating. Many of our clients tell us that this alone is worth the price.

Free – Just go to OptOutPrescreen.com to get removed for 5 years. I’m probably in the minority here, but I kind of like getting pre-approved offers myself, it helps me track trends in interest rates, special offers, and gives me an idea of how good my credit score is.

Fourth, we order your free credit reports on your behalf from the major credit bureaus and they are sent directly to you. We do this every year.

Free – Yet another feature that is free to all by the Fair Credit Reporting Act, and can be found at AnnualCreditReport.com. In fact, here are 4 more ways to get a free credit report. One of them is simply placing a fraud alert as described about. If you keep setting one up every 90 days, you can technically get a total of 15 free reports every year (3 credit bureaus x 5 each).

Last, but certainly not least: If your Identity is stolen while you are our client, we?re going to do whatever it takes to recover your good name. If you need lawyers, we?re going to hire the best we can find. If you need investigators, accountants, case managers, whatever, they?re yours. If you lose money as a result of the theft, we?re going to give it back to you. We will do whatever it takes to help you recover your good name and we will spend up to $1,000,000 to do it.

Not free. But, you can get lower levels of identity theft protection for free at various financial institutions like your local credit union or at many major banks, just for having an account with them.

So, is the convenience of LifeLock, as well their $1 million dollar insurance policy worth $110-120 a year? My vote is no. Although I’m sure that identity theft can be very painful and costly, if you really did all the free things above your chances of being affected are very slim. The time saved is minimal and the “million dollar guarantee” seems to be overkill and more of a marketing ploy. If anything, I’d use the money to go buy a good paper shredder instead.

Filed Under: Credit Cards, Deals & Offers //

The Daily Show’s Take on Credit Card Debt

Posted on June 28, 2007 // 14 Comments

Here’s a funny clip about credit cards from the The Daily Show. Thanks to Ross for the tip.

I especially like the theory that as long as your carry your debt long enough, you can simply die and never pay it off! Why didn’t I think of that??

Filed Under: Credit Cards //

Future FICO Scores Won’t Consider Authorized Users

Posted on June 3, 2007 // 37 Comments

I had written previously about renting out your credit score, which takes advantage of a loophole in the credit score formula and allows people with poor credit scores to pay others with excellent credit so as to be added as an authorized user. This currently legal act can boosts a poor credit score as much as 200 points, and is most commonly used to obtain a lower rate on their mortgage loans. As you might expect, lenders aren’t too happy about this.

According this AP article ‘Piggybacking’ Roils Credit Industry, this has led to some potential significant upcoming changes in the FICO scoring process:

Ninety percent of the largest U.S. banks base their loan decisions on FICO scores, which currently includes authorized user accounts. However, after discussions with lenders and industry officials, Fair Isaac said it intends to announce this week that all future versions of its FICO score methodology will no longer consider authorized user accounts, said Tom Quinn, Fair Isaac’s vice president of scoring solutions.

The next version is slated to roll out in September to one of the three main credit reporting agencies — Equifax Inc., Experian Information Solutions Inc. or TransUnion LLC — with the other two agencies receiving the new version some time in 2008.

Quinn also noted that some lenders generate their own scores using authorized user accounts in their calculations, so the practice may not be easily negated.

Other consumers besides credit renters stand to lose with the change, namely those for whom authorized user accounts were designed: college students on their parents’ cards and spouses with little to no credit of their own.

That’s too bad, I would think that there would be a better way to close the loophole. Perhaps simply make it illegal for one to accept money for adding an authorized user? That would at least shut down the websites running openly.

Filed Under: Credit Cards //

Who Needs Extreme Sports When You Can Be A 0% APR DareDevil?

Posted on May 27, 2007 // 11 Comments

MSN Money recently wrote a new article titled 0% daredevils chase ‘free’ cash discussing the practice of borrowing cheap money from credit cards offering 0% APR interest and no fees, putting that money into an online savings account at 5-6%, and pocketing the difference as profit!

Now, I may be a tiny bit biased, but I think my series of step-by-step posts on how to make money with 0% APR balance transfers is a better. (I suspect she might have even read it before writing her article!) I even put my warnings in the very first post. 😉

Filed Under: Credit Cards //

Pay Your Mortgage On Credit Cards, Buyer’s Agent Rebates Are Not Taxable, Japan’s Real Estate Bubble

Posted on May 25, 2007 // 17 Comments

Buyer’s Agent Rebates Are Not Taxable
It struck me that the buyer’s agent rebates I am seeking may be taxable income. That would stink. But it seems that Redfin, another company that does rebates in selected areas, received a private letter ruling from the IRS that states that such rebates are not considered income. 1099s are not submitted, and nothing is reported to the IRS.

Japan’s Real Estate Bubble
Got Bubble? I stumbled upon this article comparing the Japanese real estate bubble with the situation in the US. Did you know that residential real estate in Tokyo dropped for 17 straight years? Definitely will be reading more about this.

Pay Your Mortgage On Credit Cards
It had to happen one day. Although there are some hoops to jump through (you can’t be sub-prime) and it’s only available through specific lenders, American Express is letting people pay their mortgages with a credit card. There’s a $395 initial fee paid at closing, but the potential rewards might let you break even after only a few years.

Filed Under: Credit Cards, Real Estate //
« Previous Page
Next Page »