MONEY credit cards

The Easy Way to Get 5% Cash Back on Everything You Buy

Handing cash back
Jamie Grill—Getty Images

Maximizing credit card rewards requires you to be tactical, but the payoff is well worth the effort.

More than half of cash back credit cards return just 1%, according to CreditCards.com. But you can do better—a lot better, in fact.

Being strategic about which credit cards you choose and how you use them can have significant payoff, we discovered while making picks for Money’s 2014 Best Credit Cards.

No one card will give you back 5% on everything you buy, but you can earn about that much on average if you, ahem… play your cards right.

1. Start with the right base

Groceries are one of American consumers’ biggest expenses, and they’re the only category where you can get 6% cash back—with the right card. That card is the American Express Blue Cash Preferred, which comes with a $75 fee and a $150 sign-up bonus. The Preferred also offers 3% on gas, so it should be used at the pump unless you can do better with any of the cards in the next section.

2. Add some flair

The Discover It, Chase Freedom, and U.S. Bank Cash Plus all have two things in common: They pay 5% on select rotating categories and they have no an­nual fees. So collect all three, and deploy them on which­ ever categories are highlighted at any given time. You can see below the benefit of adding them to your rotation.

The categories that pay 5% are predetermined on the It and the Freedom. But the Cash Plus lets you choose your own from a list of 12; so just make sure on that card to select your biggest expenses after groceries that aren’t covered by the other two cards’ rotating categories.

3. Have a “plan B” card

The cards above pay 1% on most other purchases. So don’t use them for your et cetera shopping. For those purchases, use the Citi Double Cash or Fidelity Investment Rewards American Express, which earn 2% on everything.

4. Use online malls

To get you to use your cards for online shopping, many card companies have created portals that give you access to your favorite stores for additional rewards. For instance, ShopDiscover was recently offering 5% cash back at Enterprise Rent-A-Car, while you could receive 5% back from Bloomingdale’s on Chase Freedom’s Cash Back Boost. That’s in addition to whatever you’d earn for those purchases normally.

5. Hire an assistant

The It and Freedom’s 5% categories rotate every three months, and you have to opt in to enjoy the discounts. Signing up involves only a click, but you have to remember to do so. Plus, with the U.S. Bank Cash Plus, the 5% cash-back category options can change. All this requires you to stay vigilant. Download the Wallaby mobile app to help you remember which cards to use when, and set up a Google calendar alert every quarter so you remember to sign up for the rewards in the first place.

MONEY Credit

3 Credit Score Myths that Could be Costing You

credit scoring myths
Canceling an old card won't necessarily impact your score—at least not in the way you think. Fuse—Getty Images

These common assumptions could take big points off your FICO score—and leave you paying more on loans and credit cards.

If you’ve ever turned to the Internet for the answer to a question about credit scoring, you probably ended your search more puzzled than when you began.

There’s a lot of misinformation out there. And FICO, the company responsible for the most often used scoring model, only reveals limited information about how the sausage is made—which doesn’t help matters. Plus, since everyone’s credit profile is different, there are often no clear yes or no answers to common questions.

With that in mind, here are three important credit half-truths that you need to understand. After all, the more you know, the higher your score is likely to be.

THE MYTH: Closing a credit card you’ve had open for a long time will hurt your score because the formula values a long account history.

People often hesitate to close credit cards they’ve had open for years because they think that doing so will shorten the length of their credit history—which FICO admits comprises 15% of one’s score. Not so.

“Closing an account with a good payment history does not cause you to lose the history for that account,” says Rod Griffin, director of public education at Experian. “Closed accounts with a zero balance that have no negative information in their history remain 10 years from the date they are closed.”

So if you have a long and healthy credit history, you won’t likely see an immediate, sharp drop to your score if you close an old card—at least not for reasons related to length of credit history.

But you might see a dip for credit-utilization reasons. “Losing the available credit limit on that card can increase your overall utilization rate, also called your balance-to-limit ratio, which can hurt credit scores, at least temporarily,” Griffin says.

A full 30% of your credit score is heavily influenced by your credit utilization ratio. Since many people have high limits on their older cards, closing one could drive up your credit utilization ratio—and drive down your score—if you’re carrying balances on other plastic.

This could do serious damage to your score, so the credit limit—not the age of the card—is what’s most important to consider before closing an account.

THE MYTH: Your credit score will be fine as long as you pay your balance in full every month

Staying out of credit card debt is important for maintaining a good credit score, so you might be patting yourself on the back for paying off your balance in full every month.

Not so fast. If you’re charging too much at any point in time, there’s a still chance your score could suffer.

As discussed above, 30% of your credit score is heavily affected by your credit utilization ratio. And the FICO scoring model generally penalizes consumers who use more than 30% of the available credit on their cards.

FICO gets the information about what you’re charging—and all the information used in your score, in fact—from the three major credit bureaus, Experian, Equifax and TransUnion.

Here’s the rub: Card issuers typically report to the bureaus on a specific day each month, regardless of when your balance is due. This means that if you spend $4,000 on a card with a $10,000 limit, and this balance is reported midway through your billing cycle, your score could get dinged—even if you later pay it off by its due date.

To be on the safe side, keep your credit utilization below 30% on all of your cards, at all times.

THE MYTH: Applying for too many loans in a short span of time will ding your credit score

Unraveling this half-truth depends on how you define “short span of time.” Ten percent of your credit score is determined by new credit inquires, and applying for too much credit too quickly—as in, over the course of a few months—will result in lost points.

But most scoring models count several applications for the same type of loan that occur within a 14- to 45-day window as one hard inquiry instead of many. So if you’re shopping for a mortgage, try to submit your applications within a few days of each other. This is better for your score than stretching the process out over several months.

 

Related:

MONEY 101: What is a Credit Score, and How is it Calculated?

MONEY Banking

Here’s One Thing You Probably Shouldn’t Get at Walmart

Cracked piggy bank with Walmart logo
MONEY (photo illustration)—Getty Images (photo)

Walmart's new partnership with GoBank may be a decent option for those unable to get a checking account from a traditional bank, but most consumers (even low-income ones) can find a better deal.

When Walmart announced Tuesday that it would soon be offering checking accounts for the masses—so its customers could, ostensibly, conveniently deposit their checks where they purchase all their household goods—we saw an opportunity to compare the new banking option to its competitors.

Thanks to research compiled for MONEY’s annual Best Banks in America story, the latest version of which will be out on newsstands on November 28, we were able to measure up the new account against more than 200 other checking accounts.

But before we jump into our analysis, it’s important to understand what exactly Walmart is doing. First of all, the retailer is not technically its own bank (since its efforts to become an official deposit institution were basically foiled by the banking industry in 2007). The Walmart will simply offer a GoBank account through its partner Green Dot, an FDIC-insured banking platform that currently issues Walmart’s prepaid card.

The GoBank checking account—no savings as of yet—comes with a relatively low $8.95 monthly “membership fee” (essentially a maintenance fee) that can be waived with a $500 monthly direct deposit. But perhaps more interesting is the fact that it has no overdraft fees whatsoever, and virtually anyone—even those with terrible credit or a history of bouncing checks—will be approved for an account.

Greg McBride, chief financial analyst at Bankrate.com, says GoBank’s low eligibility requirements are unique in the industry and could be helpful to people who have frequent trouble with overdrafts. But McBride cautions that the people described make up a small subset of most consumers. Just one in seven bank customers have had more than one overdraft in the last year, meaning an even smaller subset of that group would be in dire need of GoBank’s leniency.

As it stands, the vast majority of people—even those with low incomes or mediocre credit scores—are able to qualify for checking accounts with similar or better terms than what GoBank offers, says McBride. Many competitors offer perks GoBank does not, such as interest payments or free use of out-of-network ATMs.

Below, we’ve set the account against some of the better options for standalone checking:

Account Maintenance Fee Minimum Interest Out-of-network ATM fees Overdraft fees? Credit score check to open?
Walmart’s GoBank Checking Account $8.95 (waived with a $500 monthly direct deposit) 0% $2.50 No No
E*Trade’s Max-Rate Checking Account $15 (waived with a $200 monthly direct deposit) 0.01% $0 (and all third-party ATM fees are reimbursed) Yes No, but they do check on past overdraft history.
Capital One’s 360 Checking Account $0 0.20% $0 Yes, but only $0.03 a day for every $100 of overdraft balance Yes
Ally Bank Interest Checking Account $0 0.10% $0 (and all third-party ATM fees are reimbursed) Yes Yes

For our Best Banks feature, MONEY also looked at mobile apps, and from what’s been announced so far, GoBank’s app does sound state of the art. A built-in budgeting program called Fortune Teller asks users to input their various bills and expenses, along with their salary and pay day. And once all the information is entered, users can ask Fortune Teller’s opinion before they buy something by entering in the price.

In theory, this sounds great—most people could use a virtual slap on the hand when they’re about to overspend. But the devil is in the details. It’s unknown how much of a financial buffer Fortune Teller’s algorithm leaves when it tells a person he or she can afford a purchase. And when the advice is coming, however indirectly, from a store that has plenty of things to sell to you, you’d be smart to be skeptical.

In other words, just because you can afford that $1,000 Gollum Halloween party prop doesn’t mean you should buy it. And just because you can get easily approved for this bank account doesn’t mean you should apply.

Related:

MONEY 101: How do I pick a bank?

MONEY identity theft

Home Depot Says Hackers Stole 56 Million Card Numbers

The home improvement retailer says it has eradicated the malware that compromised its customers' debit and credit card numbers.

MONEY identity theft

Watch Home Depot’s Response to Huge Data Breach

Hackers may have stolen tens of millions of credit and debit card numbers from the home improvement retailer.

TIME Security

Home Depot Confirms Credit-Card Data Hack

Home Depot credit card breach
The Home Depot home improvement store in Portland, ME on Thursday, September 4, 2014. Home Depot is currently investigating a potential credit card breach, and determining whether customers' card numbers were collected and sold by hackers. Portland Press Herald—Press Herald via Getty Images

The construction-equipment retailer says anyone who shopped there since April could be a victim

Hackers infiltrated Home Depot’s payment system and stole an untold amount of shopper information, perhaps including credit-card numbers, the construction-equipment retail giant confirmed in a statement Monday.

The hack “could potentially impact any customer that has used their payment card at our U.S. and Canadian stores, from April forward,” Home Depot said in a statement, adding that shoppers online or at stores locations in Mexico do not appear to have been affected.

The firm joins the ranks of other major stores, like Target and others, that have been the victims of successful, large-scale cyberattacks.

Home Depot disclosed it was looking into reports of “unusual activity” on Sept. 2 and has offered free identity-theft protection and credit-monitoring services to anyone who shopped at a Home Depot store during the months in question.

“We apologize for the frustration and anxiety this causes our customers,” Home Depot said.

MONEY credit cards

Why Millennials are Terrified of Credit Cards

Girl hiding under table
Getty Images

A new poll shows that 63% of Gen Y doesn't carry a charge card. That doesn't surprise MONEY reporter Kerri Anne Renzulli—she's among the majority.

Millennials may have no qualms about skipping cash and swiping plastic for purchases, but we are picky about what kind of card we use. A study released a few weeks ago found that 18 to 29 year olds prefer to swipe debit to credit by a ratio of 3:1.

And now a survey out today by Bankrate.com explains why millennials are reaching for their debit cards so much more frequently: Because it’s the only card many of us have.

More than six in 10 millennials do not own a credit card, the poll found. I am one of them.

For me, this survey was oddly reassuring, putting me in the majority as one of the 63% of Gen Y-ers. While I use my debit card multiple times a day, I still, at age 24, haven’t gotten my first credit card, despite heavy pressure from my parents and my older colleagues here at MONEY who urge me to begin building my credit history.

Why are we millennials making the conscious decision to push off this step?

We don’t love banks

Well, first there’s the fact that as a generation we have low levels of social trust. Having come of age during the recession, we don’t have much faith in traditional institutions like banks, and we certainly don’t want to be reliant upon them any more than we must.

My coworker and fellow cardless millennial Jake Davidson says this certainly figures into his reluctance to sign up. “I feel like credit card companies are waiting to trap me,” he says. “The whole model of their business is to get you into debt. If I use a debit card, there is never any risk of that.”

We already owe too much

Yes, it’s true that if we paid off our balances in full each month, there would be no chance of companies trapping us with revolving debt. But the idea of having to borrow any more money, even if only for a month, can feel like the equivalent of throwing away your life vest to those who are already swimming in deep waters.

I’m talking about the fact that we millennials are already overloaded. On average, we’re starting out with $27,000 of debt from student loans—and that’s just for the bachelor’s degree. Our levels of student loan debt, poverty, and unemployment are all higher than Gen X or Boomers at the same stage of their lives, according to Pew Research.

We’ve seen the dark side

Stories from our friends who’ve actually gotten a card (or two or three) are bleak enough to further scare the rest of us away.

Millennials are the least likely generation to pay their balances off in full each month. A whopping 60% of us don’t, according to Bankrate’s survey. And 3% of us miss payments completely—more than any other age group. That’s all thanks to the high levels of existing debt, low income, and underemployment that make us financially unstable.

We don’t realize what we’re missing

We can’t put this financial step off forever though, no matter how good our reasons. We will need to begin building up our credit histories if we ever want to have a chance of getting an auto loan, obtaining an insurance policy, or buying a house.

So my fellow millennials, if you need to wait for more steady financial times before signing up for plastic, please do so.

But if you’re feeling financially responsible and secure enough to add credit, you might consider easing in with MONEY pick Northwest Federal Credit Union FirstCard Visa Platinum, which is designed for people who don’t yet have a credit history. It has no annual fee, a fixed 10% APR (which is very low, given the average of 15.61%), and a $1,000 credit limit (also very low, so you can’t get into too much trouble).

The only catch is that to build good credit, you’ll want to make sure you aren’t ever using more than 20% of your available credit, or $200.

Oh, and also, you will have to take a 10 question quiz on credit knowledge to get the card—but a little schooling on the risks of plastic won’t hurt you and may even help you avoid turning a financial tool into a financial trap.

As for me, I’m six months behind my original plan to apply for my first card when I got a “real job.” But I’m feeling more motivated these days, knowing that the longer I wait, the further I’m pushing back my dream of renting a whole 600 square feet of New York apartment without my parents’ help.

More on Managing Credit and Debt:
3 Simple Steps to Get Out of Debt
7 Ways to Improve Your Credit
How Do I Pick a Credit Card?

Do you have a personal finance question for our experts? Write to AskTheExpert@moneymail.com.

 

MONEY Apple

Why Only Apple Has What It Takes To Disrupt Our Wallets

$50 on screen of iPhone
Erik Dreyer—Getty Images

Many companies have tried to revolutionize how we pay for things, but only Apple has what it takes to succeed.

Apple’s September 9 event is quickly approaching, and there is widespread consensus that the Cupertino computer giant will release a new iPhone, a smart watch, and, perhaps most unexpectedly, a mobile payments platform.

The iWatch has gotten the lion’s share of the media’s attention so far, but it’s mobile payments that might ultimately be Apple’s most important announcement next Thursday. The future has brought us fancy touch-screen phones and video chat, but we’re still paying for things in roughly the same way we did 25 years ago: by putting it on the plastic. Tech lovers have been waiting years for a digital wallet or other service that could dislodge the old system. And while many have tried, Apple may be the only company that has a real shot at succeeding.

Crowded Market, But Few Successes

If Apple actually does announce a mobile payment service—likely powered by a near-field communication (NFC) chip in the company’s newest iPhone that will allow users to “swipe” their devices at checkout—it certainly won’t be the first to promise a new and better way to pay for things.

Square, a San Francisco startup headed by one of Twitter’s founders, in 2011 introduced the Square Wallet app, which promised to let users connect their credit cards and pay for merchandise at participating retailers simply by giving their name. LevelUp, another mobile app, also connects to a shopper’s credit card; users then scan a QR code at checkout to pay for their purchases. Even mobile carriers have gotten in on the act. AT&T, Verizon, and T-Mobile have banded together to create their own payment system, Isis Wallet. The service works through NFC and ships with certain smartphone models.

But none of those businesses has managed to make the mobile payment dream come true. Square Wallet was retired in May of this year, and LevelUp lingers in obscurity. Isis, for its part, has not only failed to catch on, but might be responsible for torpedoing Google Wallet—another mobile payment effort—out of the gate when Verizon, in an effort to protect its own platform, blocked Google’s service from using NFC components on its devices.

Why have these efforts failed? Two key reasons: Processing payments isn’t a good model, and even if it were, none of these players has enough market clout to get businesses on board. Luckily for Apple, its service will be immune to both of these issues.

Great Feature, Bad Business

Being a middleman in a transaction sounds like a great business model. Billions of smartphone users spend money every day, meaning even a small slice of that commerce could be extremely lucrative. Unfortunately, those slices are generally too small to create a profitable company. Ben Thompson, founder of the technology news site Stratechery, points out that most of Square’s 2.75% transaction fee actually goes to credit card companies or the card-issuing bank, leaving Square with just 43 cents on a $50 transaction. With margins that low, it should come as no surprise that Square lost about $100 million in 2013. In mobile payments, just breaking even is a win.

That’s good for Apple, though, because the iPhone maker would be adding mobile payments as a feature, not making them its central business. Like iTunes, which until recently was run at cost, and iCloud, which gives out five gigabytes of storage for free, a payments service wouldn’t be expected to turn a profit. Instead, it would simply be a nice feature that helps sell more iPhones. That’s where Apple actually makes its money.

Too Big to Fail

Most mobile payment companies run into the problem of scale. It’s hard to get merchants to adopt a new technology if they aren’t sure a lot of their customers will use it, and the mobile payments market has been too fractured to accumulate a critical mass of users. Enter Apple, and the roughly 400 million credit cards that are tied to its iTunes service. That’s quadruple the amount of payment information Amazon holds, according to Business Insider.

In one fell swoop, Apple could become the dominant player in mobile payments and turn a confusing, splintered industry into one merchants can’t afford to ignore.

It’s all speculation for now, but the strategy adds up. Apple’s no stranger to industry disruption, and come September 9, we’ll find out whether our wallets are next on the company’s hit list.

MONEY Odd Spending

WATCH: We Try Out NYC’s First Bitcoin ATM

The Bitcoin crypto-currency may be the wave of the future, but MONEY's Jacob Davidson finds that using it to buy lunch can be a hassle right now.

MONEY Odd Spending

Meet the Drivers Making Toll Booth Lines Even Longer This Weekend

Line of cars waiting up at a toll
Bay Bridge Joshua McKerrow—AP

For some drivers, the fear of scams, overcharging, and government surveillance still outweighs the benefits of E-ZPass. They pay cash because they like talking to toll takers, too.

“Why would anyone NOT have E-ZPass?”

That question was posted at a Yelp forum … in 2007. The puzzled, frustrated individual asking the question pointed out that E-ZPass is “free and it saves so much time. It also reduces traffic for everyone. Someone, please please please tell me why everyone doesn’t have it?”

And yet, here we are, seven years later, with one of the year’s busiest road trip weekends upon us, and there will still be drivers backed up in gigantic lines at toll booths to pay cash—clogging up traffic in general while they’re at it—because they don’t have E-ZPass accounts. If anything, it’s even more difficult now to get around by car without an E-ZPass or another toll-paying transponder from a corresponding program, what with the expansion of cashless toll roads across the country. So what gives?

The Boston Globe recently reached out and talked with some “conscientious objectors” who refused to get on board with E-ZPass. Their reasons for sticking with cash and enduring longer-than-necessary waits at toll booths include:

They are concerned about government surveillance. They are apprehensive about erroneous fees charged automatically to their credit cards. They disapprove of eliminating good jobs held by toll takers for decades. And they would miss the small social exchanges with toll takers, the face-to-face contact, as they pass over their fare.

Is there validity to these concerns? Well, sure, there’s some. One of the big reasons states are pushing for cashless tolls is because doing so allows them to cut costs by getting rid of toll taker salaries. And there’s certainly nothing wrong with wanting to take a stance to help protect these workers and human contact in general in an increasingly cold, impersonal, automated world.

As for privacy and mistakes that could cost account holders money, there’s some evidence that they too are of legitimate concern. Occasionally, credit card errors or payment mix-ups result in huge bills for account holders. In one notorious case in the Seattle area, a couple with a Good to Go pass—a program that’s similar to E-ZPass—got hit with a bill for $8,346.82 because when their bank merged, the pass account was never updated, and tolls went unpaid for months. (The fines for nonpayment far surpassed the actual tolls themselves.)

By far, though, the biggest thing motivating E-ZPass refuseniks is the privacy issue. Bloggers have raised alarm bells by spreading word that the police and other authorities track E-ZPass travels all over metropolitan areas, not just at spots where tolls are paid. This summer, states such as Pennsylvania warned that phishing scammers somehow got hold of the email addresses of E-ZPass holders and were trying to get more personal information via fraudulent messages. The FTC later issued a national warning about phishing scams related to E-ZPass.

“Do I really want the government to keep a paper record on my comings and goings? No,” one E-ZPass-refusing driver told the Boston Globe. “It’s a slippery slope. Where does it end? I don’t like the trend.”

Still, considering the recent history of NSA surveillance programs and the news that a billion passwords were stolen by Russian hackers, it’s not like dumping your E-ZPass account is suddenly going to protect you from all forms of identity theft and other scams. In fact, privacy and Internet security experts generally say that everyday transactions like credit card payments and logging into email and other online accounts should be of far higher concern than using an E-ZPass.

None of this negates the need to be vigilant about protecting one’s personal information, of course. All in all, most people understand the individual’s fear of hackers and discomfort with government surveillance. Most people respect the individual’s right to make a stand about protecting privacy and workers’ jobs. It’s just that the vast majority of drivers would prefer that people wouldn’t be making this stand during Labor Day Weekend, when doing so makes already crowded roads and annoying tolls even more of a pain.

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