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Author Topic: Help me choose a credit card
Chris Bridges
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I am just about the point in my personal economic overhaul where I'd like to start making my money work a little harder. One way is to pay my bills/make purchases with a credit card with a good rewards program, and then pay the credit card in full every month to maintain low interest rates and avoid charges. I'm automatically paying all my bills on time every month already, this just means plugging a new step into the process. But which card do I pick?

Currently I bank at a local credit union (family account) and with Wachovia (now Wells-Fargo) for my personal account; both offer cards. TomD, responding to my question on Facebook, suggested Discover as having the best cash-back program, but I'm concerned not everyone takes Discover.

As for preferred rewards: cash back is always good, merchant rewards can work if it's a merchant I use (mostly Amazon, frankly), miles would do me little to no good as I don't travel often.

What card do you use, that you've had success with?

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rivka
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I suggest Discover as well. It's true, not everyone does take it, but most merchants do -- and the percentage keeps increasing. I keep another card for those few that don't take it, but use Discover whenever possible.
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AvidReader
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I like to have two anyway just in case one isn't working. I've been eying the junk mail for the Chase cards I've been getting. I just need to look them up sometime and make sure they're not evil or anything. [Smile]
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Lyrhawn
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I've been considering getting an Amazon card, given such a large majority of my purchases are made there.

I've yet to find anyone who comes close to competing with the rate my local credit union gives me on my credit card, so other than having an extra line of credit for credit score purposes, I've yet to see the point.

What is Discover's program like?

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Chris Bridges
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Hmm. Hadn't thought about the Amazon card. It's basically a Chase card with Amazon points instead of cash back.

Top contenders so far seem to be the Chase Freedom card and the Discover More card. I'm going to take my last six months of purchases and see if I can tell what I would have gotten back, had I used each card.

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Chris Bridges
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Looking at the various cash back offers; they don't really add up to much, do they? The travel miles seem to provide the most value -- not necessarily for me, as I don't travel much -- and the rewards packages might get more than cash since they often bump up the value, provided I actually use the offers. They make this stuff way too complicated.
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scifibum
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This is a perfect example of what Scott Adams calls a confusopoly.
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TomDavidson
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Chris: Discover gives 2% cash back on everything, and every month they pick a category -- from gas purchases to restaurants -- for which they give 5% cash back. This cash back can be applied to your monthly bill, sent to you as a check, or redeemed for gift certificates at a variety of vendors (often at 5:4, like a $25 GC for $20, but it's often higher for overpriced "speciality" shops like travel agencies or Omaha Steaks.)

Travel miles are getting increasingly useless nowadays, since airline "fees" make up an increasing percentage of the ticket price and aren't covered by mileage programs. And you definitely don't want any reward program that sends you things in exchange for points (like iPods or magazine subscriptions), since such "things" are always almost ridiculously overpriced and exchanged at a very poor per-point ratio.

You want a card that gives you consistent cash-back with the opportunity to convert that cashback into higher-return rewards of your choice at vendors you actually use. There are surprisingly few cards that do this.

I use two credit cards: a Discover card that gives cash rewards, and then a Visa card that gives my wife United miles (for when the Discover card isn't accepted). Christy flies rarely enough that her United miles were always in danger of expiration; by putting 10 or 20 miles on there a month, we keep them alive for when she actually does travel.

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theamazeeaz
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I have an Amazon card. You get 3% on Amazon, 2% on "everyday purchases" (which means gas and restaurants, places I do not go to everyday since I do not own a car and often pay cash when I eat out) and 1% on everything else. This rate is doubled for the first three months you have your card (or was when I got mine).

I am a graduate student who recently spent the last year on a dorm executive committee and I occasionally travel for work so I may be called on to charge things in excess of $100 for which I will be reimbursed.

The Amazon card will give you $25 at Amazon for every $2500 (at the lowest earning rate). You can get a $50 check for $5000 spending and there are gas and hotel cards (again, about 1%, so why not just get cash) and plane ticket options for higher spending (here there are some "discounts"), but the cost caps are lower than the ticket cost. For instance, you can get a ticket to South American only if it costs <$1000, but I'm going to Chile this summer and the tickets cost ~$1300- so this deals are unrealistic at best.

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Valentine014
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Does the Discover card have an annual fee?
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rivka
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Nope. I don't do cards with an annual fee; regardless of their rewards program, you start out behind.
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ElJay
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Chris, why do you want a card? Just for the rewards, or to build your credit score before a large future purchase?
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Chris Bridges
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Rewards. My credit score is pretty decent without them. My figuring is that I'm paying automatically anyway; if I pay automatically with a CC and then pay that automatically, I get the benefits of using the card without incurring interest.
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ElJay
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Using a credit card that way could actually damage your credit, depending on the card limit and how high your bills are. I'm not an expert, but I took a continuing education class recently (for my real estate license) on credit scores and how they are calculated. The teacher was a financial adviser who specializes in helping people rebuild their scores after financial hardship, and minimize damage in the first place if they know they're going to have to go through a bankruptcy or foreclosure or something. In order to do this effectively, he's spent the last couple of decades finding people who work in the IT departments of the credit agencies and banks and bribing them to tell him how credit scores are calculated.

If you have decent credit, it probably won't matter, because you'll be able to get a card with a higher limit. If you could only get a card with a $500 - $1000 limit, paying all your monthly bills on it and paying it off every month would be a hit to your credit. According to this guy, as long as the balance on a card stays between 5% - 20% of the limit and at least the minimum payment is made monthly, it improves your credit score. If you let the balance get between 20% - 40%, the benefit starts going away. Every percentage point over 50% is a 1 or 2 point direct reduction of your credit score, depending on agency. So if you max out your card, you can take a 100 point hit to your credit score, which is enough to affect things like your car insurance rate.

Those percentages are average daily balance, though -- so if you max it out in the middle of the cycle and pay it in full, it would only calculate out at 50%.

Anyway, just wanted to throw that out there. If you've already got your mortgage and insurance rates locked in, it's not such a big deal.

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Kwea
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Whatever you do, don't charge more than half of your limit on ANY card. You get a hit on your credit once you go over half your available limit on any card, then another HUGE hit when you go over 3/4ths your limit again. So if you go over 3/4 the limit you get hit TWICE, even if you pay it off. You do that every month and you get detrimental credit reported.


It's kinda odd...if I owe $10,000, but my limit is $25,000, I am fine. If my sister had a $400 limit and charged $350 on it she would LOSE Beacon points on her credit score. It's usually a one for one reduction on points from 50% of the limit to 74%, and 75% and more is a 2 for 1 reduction of your Beacon score. So for every percent of credit they extend above 75% your AVAILABLE limit, you lost 2 points on the Beacon score.....which is HUGE.


I worked for a mortgage company briefly, and they worked with people to improve their credit constantly. Their advice worked well, although it isn't as detailed as the info ElJay posted. I'd bet the advice her teacher gave was VERY similar to the advice we gave clients.

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Kwea
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As far as a card, I like the Southwest Airlines card. It lets me earn flights, and since my family lives all over the country that comes in handy. Southwest might not be teh most comfortable airline, but they are on time and fly everywhere we need to fly.
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theamazeeaz
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This limit I was given for the Amazon card was $2000, and $1000 is enough for most reimbursed purchases. Actually, my first credit card came with a $500 limit is useless (I had remembered reading the 50% rule here before), but got randomly bumped up to something where I could actually buy stuff without using my debit card.
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theamazeeaz
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Also. I. hate. current. interest. rates.

As a kid, I was told that if I put money away in my 20s, compound interest would magically make me a millionaire. At what rate? Bah. I googled: it's like 8%. Yeah, uh-huh. I'm saving that amount of money the 20-something needs to but there's no where to put it.

They suck.

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Mucus
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quote:
Originally posted by theamazeeaz:
Also. I. hate. current. interest. rates.

QFT
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scifibum
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Credit bureaus must have a good laugh at all the hoops we try to jump through.
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ElJay
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The most interesting thing he talked about is how to repair your credit score after a bankruptcy or foreclosure. You need 3 - 6 years of on time monthly payments to bring your score back up. But they don't have to be consecutive. So he advices clients to get 6 low limit cards, set them all up to pay the minimum monthly payment automatically, and put them in a safe. When you need to buy a tank of gas or a dinner out, something around $50, take one out and use it, then rotate through until there's $50 on each of them. The minimum monthly payment is $15, so it will take about three months to pay down $50, when it has, repeat.

In one year, you will have a six year record of on time monthly payments and a credit score around 740. You'll still have the bankruptcy or foreclosure showing on your record, they stay for 7 years. But your score will be high, you'll have good interest rates on everything you need, and you'll be able to get a mortgage again after 36 months. It only works, of course, if you have the discipline to not use those cards for anything but one $50 charge every 3 months with the minimum payment being taken out automatically.

Carrying a small balance raises your score more than paying a balance off every month, and credit cards account for 35% of your credit score. It's insane. My favorite line was "Credit cards are not for shopping with, however they are an excellent way to manipulate your credit score."

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theCrowsWife
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This is why we no longer participate in the credit market, except for a single credit card used for internet or large purchases, which gets paid off immediately (even before the end of the month, usually). The game is rigged for the benefit of the credit issuers, and I'm not interested in playing by their rules.

--Mel

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scholarette
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I like having a credit card because there are certain protections that come with it (namely fraud protection). A merchant screws me over and my credit card company makes it all better. I pay off every month and use around 5-10% of my available balance, but I do like the security. If card gets stolen, I still don't pay anything. When my purse got stolen, I lost all the cash, gift cards, etc, but since I rarely carry more than $20 on me, that was not that bad (the gift cards sucked because it was Christmas and I had done a shopping spree of gift cards that day and did not have the numbers written down- I know if you have gift card numbers, you can often get those back too).
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Kwea
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quote:
Originally posted by theamazeeaz:
Also. I. hate. current. interest. rates.

As a kid, I was told that if I put money away in my 20s, compound interest would magically make me a millionaire. At what rate? Bah. I googled: it's like 8%. Yeah, uh-huh. I'm saving that amount of money the 20-something needs to but there's no where to put it.

They suck.

Compound interest is one of the most powerful tools you can use, and you do not need 8% for it to be worthwhile. It is also one of the least understood tools.

The difference between starting to save in your 20's vs 10 years later is staggering.

Great site, including charts. Look at the contribution needed per year to see the difference between saving at age 20 vs age 40. You need to save over 26,000 a YEAR at age 40 to reach the same amount that $5000 a year gets you at age 20. This chart DOES assume a rate of 8%, but it ends up with you have almost 2 mill in savings. cut that in half if your rate is 4-5%. [Big Grin] (joking...because of that compound interest, it's less than half, but still impressive)

Here is a tool that helps explain it.

[ May 19, 2010, 12:57 PM: Message edited by: Kwea ]

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fugu13
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theamazeeaz: at your age, put your money in low-interest, higher-risk index funds. My return on periodic monthly investments (over a period that includes the start of the crisis, though most of my money was invested after it, since it is a periodic investment) is fairly respectable; about 5% a year, I think.

In the long term, compound gains will be astounding. If you don't mind my asking, how much are you putting away? It should be relatively simple to guesstimate if you'll be a millionaire or not [Wink] .

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Kwea
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From that article I linked to first:

quote:
If Britney makes $5,000 annual contributions to her Roth IRA, and she earns an 8% return, she’ll have $1,932,528.09 saved at retirement. But if she waits even five years, her annual contributions would have to increase to nearly $7,500 to save that same amount by age 65. And if she were to wait until she was my age, she’d have to contribute nearly $25,000 a year!

To make compounding work for you:

Start early. The younger you start, the more time compounding has to work in your favor, and the wealthier you can become. The next best thing to starting early is starting now.
Make regular investments. Don’t be haphazard. Remain disciplined, and make saving for retirement a priority. Do whatever it takes to maximize your contributions.
Be patient. Do not touch the money. Compounding only works if you allow your investment to grow. The results will seem slow at first, but persevere. Most of the magic of compounding returns comes at the very end.
Compounding creates a snowball of money. At first your returns may seem small, but if you’re patient, they’ll become enormous.


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