MONEY holiday shopping

Why Gift Cards Are a Crime Against Christmas

rack of gift cards
Sarina Finkelstein

The act of gift-giving is an act of affection. Show a little effort.

Whether you celebrate Christmas, Chanukkah, Kwanzaa, or all or none of the above, the holidays are always about one thing: showing your family and friends how much you care.

That’s why the average person spends 14 hours shopping for gifts for their loved ones. That’s why kids scrape together $400 to fly across the country to spend Christmas Eve with their cousins in Cincinnati. That’s why husbands watch Love Actually.

The holidays are a time to say to your family and friends, “Although you drive me crazy all year round, my life would be empty without you.” But that’s weird, so you buy your mom a stupid embroidered pillow that says it for you.

Gift cards, on the other hand, aren’t about any of that. Gift cards are about efficiency. Gift cards are about corporate profit. Gift cards degrade the entire exercise of gifting. (Unless you are my colleague Jake Davidson, whose impassioned defense of this deplorable practice you can read here.)

A gift card says, “I couldn’t be bothered to think of you this holiday season; help yourself to exactly $25 worth of crap from Target.”

Gift cards are a crime against Christmas.

Let’s start with the basic etiquette problem. The first rule of gift giving is, don’t say how much you paid for your gift. Simple. So why get a gift receipt for one person, then hand the next person a gift card emblazoned with the exact amount of money you spent? You’ve just put a definitive monetary value on your relationship. When did we decide this was an acceptable social practice?

I know, I know—it’s hard to find thoughtful gifts for everyone on your list. But don’t think your friend will do a better job. It’s even more difficult for people to give good gifts to themselves. Here’s why: Researchers have found that when people are given “play money” like gift cards, they’re more likely to spend it on stuff they don’t need. In fact, they’re more likely to overspend. CEB Towers found that 65% of gift card users spend 38% more than the value of the card.

Alternatively, your gift card may sit, unused, in your loved one’s wallet or junk drawer. Industry insiders call this “spillage,” and companies can count on American consumers to spill almost $1 billion in gift card balances this year. Believe it or not, that’s down 88% from what it used to be, before Congress passed the Card Act, which put limits on expiration dates and inactivity fees.

And what happens to the money on unwanted gift cards? Obviously the retailer profits, but the Wall Street Journal has also reported that states in dire financial straits have tried to seize the value of unused gift cards using statutes that allow states to collect “abandoned property.” (You can check your state’s laws here.) In other words, buy a Target gift card that your friend never uses, and you’ve essentially given a gift to Target and/or your governor.

The worst are the general-purpose cards that you can spend anywhere. First of all, why didn’t you just give cash? Second, these “gift cards” aren’t actually gift cards in a legal sense. They’re prepaid debit cards, and they’re not subject to the same consumer protections as either gift cards or real credit cards. That means general purpose cards can come loaded with activation fees, inactivity fees, and other fees that degrade the value of the card.

And finally, if you go through all the hassle of finding a personalized gift for your loved one and then he doesn’t like it—so what? The act of giving is an act of affection. It’s not meant to be an efficient way of allocating goods. The Three Wise Men gave baby Jesus gold, frankincense and myrrh. Did a new mother, her betrothed, and the infant Son of God really need aromatic resin as they were fleeing persecution? Probably not. But that’s why the Three Wise Men were wiser than you.

COUNTERPOINT: Why Gift Cards Are The Only Present That Makes Sense

MONEY Debt

Why Paying Off Those Holiday Gifts May Be Harder Than You Think

man with ball & chain attached to leg
Ingram Publishing—Alamy

More than a third of Americans have already gone into debt for the holidays, and many will find it more difficult to repay than they imagine.

As the holidays fast approach, 38% of Americans have already gone into debt for gifts, new research shows. Many will be shocked at how long it takes for them to pay all they owe.

In general, consumers do not expect their seasonal spending to set them back for long. More than half say they will pay for the spending spree by the end of January, and three quarters expect to be free from holiday debt by the end of March, according to a survey from CreditCards.com.

Nearly 1 in 5 Americans with debt say they will never be debt free.Just 5% worry that they will still be paying for this year’s holidays a year from now. That seems optimistic. Some 7% of consumers entered this season with unpaid debts from last year, according to a blog from the Center for Retirement for Retirement Research. (The figures were even higher in previous years.)

The survey further reveals how misplaced this optimism may be. Nearly one in five Americans with debt say they will never be debt free. That is double the rate of those who felt the same way in a survey last May. So as the economy has turned up in recent months, it seems debt spending has followed suit—accompanied by escalating angst over the debt hole consumers may be digging.

The typical consumer expects to be completely debt free, including a fully paid mortgage, by age 53, the survey found. Yet nearly half worry they will still owe at age 61, and 18% believe they will have debts when they die.

On cue, millennials are the most optimistic generation: Just 16% of those aged 18 to 29 with debt say they will never get out of debt, compared with 31% of those aged 65 and older and 22% of those between the ages of 50 and 64. Meanwhile, high-income households (those earning more than $75,000 a year) are only slightly more optimistic about paying off holiday debt than low-income households, suggesting that everyone is letting go a bit and testing the limits of their earning power.

America’s debt culture is a big contributor to the retirement savings crisis. Other studies show an increasing debt burden on seniors. Those past the age of 60 saw their average debt jump between 2005 and 2014, TransUnion reported. More seniors are carrying student debt all the way into retirement, a government report found.

Today’s spending may have far reaching consequences. To keep spending under control this season, create a holiday budget and stick to it. Track everything you spend. Pay off your highest interest rate cards first and consider transferring balances to a lower rate card. You might be able to negotiate a lower rate if you call your credit card company.

Read more on managing credit and debt in Money 101:
How Do I Get Rid of My Credit Card Debt?
Which Debts Should I Pay Off First?
How Can I Improve My Credit Score?

TIME Travel

The Best Credit and Debit Cards for Travelers

89024824
Image Source—Image Source/Getty Images

Rack up rewards and avoid foreign transaction fees

This article originally appeared on Map Happy.

I think the time when Ben Franklin’s old adage “a penny saved is a penny earned” rings truest is when I’m traveling abroad. ATM and foreign transaction fees just add up too fast.

Generally, any money I save is money I can put toward something I actually want to spend it on. Whether that’s a hot air balloon ride in Cappadocia, wine tasting in Mendoza or street food at 4 a.m. pretty much anywhere in the world, I can think of infinite better uses for my money than forking it over in fees. (My utopia is also one in which roaming charges are nonexistent, but that’s a conversation for another time.)

The great thing is that it’s totally avoidable to hold onto that money if you play your cards right. When you’re spending money fee-free on a flight for your next trip or meal out, many cards will even throw that back to you in forms of cash or valuable points toward travel. Behold, Map Happy’s list of the best credit and debit cards for traveling. This plastic, its fantastic.

Barclaycard Arrival World MasterCard

This is one of the best travel credit cards out there because there’s no foreign transaction fees and no annual fee. Every time you spend money, you’re pretty much earning travel-related rewards. Users earn double miles for every dollar spent on travel and dining, and a mile per dollar for everything else. Plus if you redeem your miles for any travel purchase, you get 10% of those miles back. There’s also a 20,000 mile sign-up bonus if you spend at least $1,000 in the first 90 days your account is active. Can you see yourself circling the globe yet?

There’s also the even-more-baller Barclay Arrival Plus World Elite MasterCard (for an $89 annual fee that’s waived after the first year) that has beefed-up benefits including a 40,000 mile sign-up bonus and double the miles on all purchases. This card also possesses the EMV chip that’s pretty much a requirement to swipe your plastic pretty much all over Europe these days.

Chase Sapphire Preferred

If you have commitment phobia when it comes to particular airlines or hotel groups but want to rack up the travel rewards all the same, this could be your card. Chase has partnerships with a ton of travel industry biggies like United Airlines, Virgin Atlantic, Marriott, Ritz-Carlton and more. What that means for you is that you can transfer all your points 1-to-1 hassle-free to all those companies. The sign-up bonus isn’t slouchy either: 40,000 bonus points for $3,000 spent in the first three months the account is open.

With the Chase Sapphire Preferred, you can earn double points for money spent on travel and dining while earning one point per dollar for everything else. There are no foreign transaction fees and the $95 annual only kicks in after the first year. Of course, there’s no way it could make this list without having an EMV chip option. We actually did a full review on this credit card a few months back.

Chase has a whole travel-friendly infrastructure set up, too, and if you book anything like flights, hotel stays, cruises and car rentals through their Chase Ultimate Rewards program with points, there’s an automatic 20% discount. (And they’re not jacking up their prices, either; they’re comparable to all the major travel search engines.)

This could be the card for traveling couples, too: There’s 5,000 bonus points when you add an authorized user soon after opening the card. Chase is pretty helpful to cardholding travelers in other nice ways, too, like lost luggage reimbursement or if you’ve accidentally lost your phone at Disneyland. (If the airline doesn’t care, at least Chase should!)

Capital One Venture Rewards

Travel credit cards don’t get much more straightforward than this Visa card. You earn two miles for every dollar spent—whatever it is—and there are no foreign transaction fees. The sky really is the limit on how many miles you can earn and those miles never expire. Like most of the premium travel cards, the sign-up bonus is 40,000 miles if you swipe $3,000 worth of purchases in the first three months. The card comes with some thoughtful amenities, too, like automatic travel and car rental insurance and around-the-clock roadside assistance.

The annual fee, waived the first year, is $59. The watered-down but also rather impressive version of this card is the VentureOne Rewards Card which comes with no annual fee and rewards users with 1.25 miles for every dollar spent.

Charles Schwab Bank

In truth, credit cards can only take you so far, because no matter where you are you’re also going to need cold, hard cash. The way I like to do it is to take out money in manageable increments as I go along to avoid ending up with mounds of foreign currency at the end of a trip (and losing out when changing it all back). But that really only makes any sense at all if you can dodge ATM fees. Enter Schwab Bank.

The High Yield Investor Checking Account quite frankly sounds intimidating. In fact, the name potentially scaring people off is the only reason I can think of as to why everyone isn’t already carrying this card, because it’s a real win. (Or if you’re like Erica, you’ve managed to find a real use for that brokerage account.) There is no minimum balance—really, $0—no monthly service fees and you will never pay an ATM fee. To be accurate, every single one of your ATM fees will be rebated when you withdraw money with the debit card tied to your Schwab account. That’s money in the bank for you.

Armed with this debit puppy and any of the other listed credit cards, you’re set to pay for everything on the road fee-free. Go forth and draw money freely.

Capital One Quicksilver Cash Rewards

There aren’t any specific traveler perks per se with this card but it’s still one of the simplest, travel-friendly cards there is. Swipe away around the world without a care, because there are no foreign transaction fees nor is there an annual fee.

It’s a card where you don’t have to worry about the who, what, when, where or how when it comes to managing with your points. You’re getting cash back at a flat rate of 1.5% for everything. Brainless. That’s a slightly better cash-back rate than you’ll get with most other cards and it adds up.

Worth noting

NerdWallet has done some good legwork and rounded up a pretty exhaustive list of all credit cards with no foreign transaction fees. Some key points:

  • All Discover and Capital One credit cards have no foreign transaction fees.
  • Thinking small isn’t a bad idea. Most local credit unions don’t charge foreign transaction fees.

While it’s also common to see airlines hawking credit cards at the airport, hotel credit cards are another route that people also often overlook. If you feel allegiance to one particular chain or just happen to find yourself staying with one brand more often than others, it’s worth considering. The Starwood Preferred Guest American Express credit card has a number of airline and hotel benefits that add up fast and is also another favorite

Ultimately, go with what’s right for your budget and travels. There’s a card out there for everyone.

Read more from Map Happy:

MONEY credit cards

6 Times You Should Use a Credit Card Instead of a Debit Card

Handing Hotel Key and Credit Card at hotel reception desk
Carmen MartA-nez BanAs—Getty Images

Credit cards help and protect you in a big way under these six circumstances.

In the wake of the Great Recession, debit cards became increasingly popular among many who wanted to avoid the possibility of incurring debt. In fact, debit cards have several important qualities that credit cards lack, and there are times that even the biggest credit card fans should use their debit cards. Likewise, there are also some instances that debit card users should consider breaking out their credit cards.

Here are six times that you are better off using a credit card instead of a debit card.

1. Renting a Car

One of the most valuable perks offered by most credit cards is rental car insurance. These policies cover renters in most situations, and typically have a reasonable $500 deductible. On the other hand, there are no debit cards offered with rental car insurance policies. Furthermore, those trying to rent a car with a debit card need to purchase their own insurance, and submit a large deposit in the form of a hold on their account.

2. Staying in a Hotel

Like rental car companies, hotels will require debit card users to submit a deposit in order to rent a room. In this case, the deposit is required to cover any damage to the room, as well as any incidental purchases such as room service. But when using a credit card, there is merely a temporary authorization placed on the cardholders account. While this temporary authorization will use up some of the cardholder’s credit limit, it is far less of an issue than with a debit card, which freezes a cardholder’s available bank funds.

3. When Paying Your Balance in Full

When people give up on credit cards and switch to debit cards, they are giving up the possibility of earning rewards in exchange for eliminating the chance of incurring debt. Yet when credit card holders pay their balance in full each month, they never have to pay interest or get into debt. Rewards credit cards that offer valuable points, miles and cash back can be seen as a significant discount on a purchase. For example, some credit cards offer as much as 5% or 6% cash back at select categories of merchants. In addition, these cardholders receive a free loan for as long as 55 days.

4. Ordering Something to Be Delivered in the Future

When you order goods over the phone or the Internet, or you pay for services that have not been delivered, the method of payment you use makes a big difference if you never receive what you paid for. Debit card users have no recourse with their card issuers when they legitimately authorize a charge for goods and services that are never received. Instead, they must pursue a refund directly with the merchant or take them to court. But with credit card charges, the cardholder has the ability to request a chargeback when the goods or services ordered are not delivered as promised. When a chargeback is requested, card issuers immediately issue a temporary credit, which is made permanent once the cardholder’s claim is documented.

5. When You Need an Extended Warranty

When purchasing consumer electronics, many shoppers are asked to pay extra for an additional extended warranty. Yet most credit cards include extended warranty policies that cover purchases for an additional year beyond the manufacturer’s warranty. You will not find this feature in a debit card.

6. When You’re Traveling

Even travelers who don’t rent a car or stay in a hotel can still find plenty of valuable features in popular credit cards. For example, cards might include trip cancellation and trip interruption policies, which covers basic expenses when travel plans go awry. In addition, many cards offer lost or damaged luggage insurance, which covers losses that airlines do not. And finally, many credit cards offer travel assistance hotlines to help travelers arrange medical or legal assistance, or co-ordinate roadside automobile repairs.

Finally, it bears repeating: When you use a credit card for purchases, it’s ideal to spend no more than you can pay in full each month. If you carry a balance from month to month, it’s important to come up with a plan to pay it down so you don’t spend as much in interest charges over time. Because those can really add up. You can see how long it will take you to pay off your credit card debt using this free calculator, and you can also see how your credit card use is affecting your credit scores by getting your free scores on Credit.com.

More from Credit.com

This article originally appeared on Credit.com.

MONEY identity theft

Here’s How to Make Sure You Don’t Get Cyber-Scammed on Cyber Monday

141128_EM_CyberTheft
Patrick Strattner—fStop Images/Getty Images

'Tis the season for identity theft. Online shoppers, protect yourselves.

As consumers start their holiday shopping, virtually everyone has the same Christmas wish: Please, don’t let anyone steal my identity.

A recent survey from TransUnion found that 96% of Americans say they’re worried about identity theft this holiday season, and almost two-thirds are more worried this year than they were last year.

And they’re not wrong—identity thieves like to strike during periods of high activity, like Black Friday and Cyber Monday. “Criminals fish where the fish are,” says Ken Chaplin, senior vice president for TransUnion. “This time of year, a lot of people are fairly busy and flustered and just trying to get things done, and they might not be as careful or diligent.”

When you shop at a brick-and-mortar store this season, it’s mostly up to retailers to keep your information secure. But when you shop online, you can fall into traps. Here are the do’s and don’ts for staying safe:

DON’T click on links in retailer emails.

Hackers like to prey on deal-hunters by sending “phishing” emails that look like they’re from brands you know and trust, says Joe Siegrist, CEO of LastPass, a password management and information security company. Then when you click on the email link, the hackers redirect you to a fraudulent site and steal your information.

If you see a great deal, double-check. “Go directly to those sites instead of clicking on links in the email,” Siegrist says. And legitimate businesses should never contact you to ask for your account information or password—if you get an email that does, go directly to the business’ website and enter your information there, or call the business to make sure the request isn’t fraudulent, Chaplin adds.

DO check to make sure you’re shopping at a secure website.

The tell: the URL. The address line should begin with https. That “s” is key—it means the information is being sent over a “secure” line, Chaplin says.

“You might do a web search for an item, and then you’ll click on some sort of a link, and that link might take you somewhere that’s not where you want to go,” Chaplin says. “Be sure that you do business only with websites that have the proper security measures in place.”

DON’T shop on public WiFi networks.

Thinking of sneaking out to a coffee shop to do a little online shopping on your lunch break? Be careful, Chaplin says. Only enter sensitive financial information like credit card and bank account numbers on secured WiFi networks with passwords. On networks without passwords, “whatever you’re typing and viewing online could be seen by someone else,” Chaplin says. “An open WiFi network is not secure.”

Phishers love open WiFi networks, too. “It’s a lot easier to fool you into thinking you’re on a legitimate site when you’re not,” Siegrist says. “They can replace the contents of the page with something they want to be shown.”

DO keep your software up-to-date.

To protect yourself from identity theft, keep your computer safe from malicious adware, Siegrist says. There are a number of adware removal tools out there, but here’s the free and easy way to protect your device: Say yes to software updates. That means installing Windows and Mac updates as they become available instead of always clicking “later.”

And pay extra attention to your internet browser of choice. “Your browser is a very important one—make sure you keep that up-to-date,” Siegrist says. “You have to actually restart your browser to get [the updates]. Don’t run your browser for days on end without a restart, especially if it’s indicating to you that it needs to.”

DON’T use a debit card for online shopping.

Credit cards have better liability protection than debit cards. And when you use a debit card, funds come straight out of your account, so it can take longer to recover your money if someone racks up fraudulent charges.

DO use a different credit card for online purchases.

If you can, use one credit card offline and a different credit card online, Siegrist says. That way, it will be easier to detect fraud. Need a new credit card? Check out MONEY’s Best Credit Cards for holiday shopping and for all year round.

DON’T save your credit card information on websites.

When you shop online, retailers will often prompt you to save your credit card information so that you can buy more items quickly and easily at a later date. Don’t do this.

“You definitely increase your risk when you store your credit cards at these sites,” Siegrist says. “The site itself is then keeping that credit card stored—that makes it a target for hackers.”

DO change your account passwords.

If you do have accounts at different online retailers, change your passwords at least once after Cyber Monday. That way, if any of the sites are hacked during the holiday season, your accounts will be more secure. “It’s good internet hygiene,” Chaplin says.

When you change your passwords, don’t reuse passwords across multiple sites—or else you’ll be giving hackers the master key to multiple accounts. Use this trick to create really secure passwords that you’ll actually remember.

And whenever possible, set up two-factor verification. That way, no one can get into your accounts without both 1) your password and 2) another separate piece of information sent to just you—like a text message or a code retrieved from an iPhone app. Here’s how to enable two-factor verification.

DON’T stress about credit card fraud.

Look, it’s no fun when a hacker steals your credit card number. But credit card number theft won’t wreck havoc on your financial life like other kinds of identity theft. Your liability for fraudulent charges is extremely limited, especially when a hacker just steals your card number and not your physical card. In that case, you owe nothing. And after a big data breach, your financial institution might mail you a new card no matter what, just to be safe.

(If someone steals your actual card and uses it, you could be out up to $50 on credit cards or $500 on debit cards—but that’s not relevant in cyberworld.)

Be worried if a hacker gets your social security number. In that case, a fraudster could open new accounts in your name and ruin your credit. If that’s what you’re afraid of, here’s what to do. But you shouldn’t be sharing your social security number when you shop online, anyway.

DO check your statements.

That said, you should still keep a close eye on your credit card and bank statements for suspicious activity, especially at this time of year. That aforementioned liability protection is only helpful if someone detects the fraud. With credit cards, you’ll want to identify fraudulent charges before you pay your bill. With debit cards, you need to report any fraudulent charges within 60 days of receiving your statement to get your money back.

And read the statements closely. “Criminals are a lot smarter than they used to be,” Chaplin says. “It used to be a huge charge would show up on your card and your bank would call you. Oftentimes now a charge will be $20, $30 a month, and you might not be aware of it.”

But never fear—though identity thieves may have gotten smarter, you can still outsmart them.

Related

MONEY credit cards

The Best Credit Cards for Holiday Shopping

credit card purchase of holiday present
Lucas Lenci Photo—Getty Images

'Tis the season to spend! These cards can help take some of the pain out of your purchases by giving you cash back, protection against price drops and extended warranties.

The holiday season is upon us, which means it’s time for you to open your wallet.

The average American expects to spend $781 on presents this year, according to Gallup—the most since 2007. Use the right plastic, though, and you can shave some off that bill, or at least get more for your money.

Below you’ll find the best cards for rewards, price protection and extended warranties. They should make your holiday a little more merry. Ho, ho, ho.

Best for Holiday Rewards

Two no-fee cards—the Discover It and Chase Freedom—are offering Christmas shoppers fat cash back.

From October through December, Discover It cardholders can receive 5% back—on purchases up to $1,500—at online retailers that include Amazon and Zappos, and department stores like Bloomingdale’s and Sears.

Discover also has a robust online shopping portal—ShopDiscover—where its customers can earn additional cash back simply by using the online mall. So combining ShopDiscover’s 10% back from Acehardware.com with the 5% back that the card gives you normally, and you’ll reap $15 on a $100 purchase.

Over the same time period, Chase Freedom also offers shoppers a chance to earn 5% back on up to $1,500 of their holiday gift list.

The Freedom limits online discounts to Amazon and Zappos, but has a varied department store list that includes JCPenney, Kohl’s and Nordstrom. Also, Freedom cardholders usually receive a $100 sign-up bonus—although that’s been bumped up to $200 for a limited time—if you spend $500 in the first three months of opening the card. And you can receive $25 for adding an authorized user and making a purchase within 90 days. So you have the possibility of earning up to $300 by year’s end.

Best For Price Protection

Some issuers and networks offer price protection on certain purchases, meaning they will reimburse you the difference when the price of an item you’ve bought drops within a specific period of time.

“Having managed benefits for an issuer in the past, I can tell you that very few consumers are aware of the coverage they may have,” says Ben Woolsey of CreditCardForum.com. “I would be amazed if one in 100,000 consumers ever makes a claim.”

Not every item is covered (generally not cars or event tickets or anything off eBay), and refund maximums are limited per item and per year. But you can still save yourself some significant dough—not to mention fits of rage—when you see an expensive television you bought at full price go on sale a few days later. Plus, the price protection windows tend to be long enough that if you buy now you’ll be able to take advantage of steep after-holiday discounts.

Citi Price Rewind offers a max refund of $300 per purchase and $1,200 per year, and gives you 60 days to receive the lower price. Unlike Discover and MasterCard Price Protection, you don’t have to keep track of your own purchases, notice if the price drops and submit a claim. Instead you register the item on the Price Rewind site and it notifies you if the price has dropped.

Of the three major protection programs, Discover has the most generous refunds ($500 per claim and $2,500 per year) and the longest time to submit a claim (90 days). MasterCard, meanwhile, gives you 60 days and limits your refunds to $250 per item and four claims a year. For more details on these three major programs, see NerdWallet’s roundup.

A great no-fee rewards card that includes this insurance is MONEY Best Credit Card winner Citi DoubleCash. You’ll receive an unlimited 2% cash back on everything—1% when you swipe the card and 1% when you pay your bill—in addition to a price protection program that requires the least amount of work on your end.

Best for Extended Warranties

Are you among the 31% of consumers who buy extended warranty programs each year? Well, skip that expensive insurance—MONEY generally doesn’t think the plans are worth the price they go for anyway—and use the right piece of plastic.

Credit card networks (Visa, MasterCard, American Express and Discover) typically offer a similar type of protection.

CardHub.com recently released a report on which network offers the best extended warranty, and selected Amex as the winner. All Amex cards are eligible for extended warranty, and unlike Discover or MasterCard, the program covers refurbished items as well as failure due to wear and tear.

If you’re in the market for a new card and want this kind of protection, your best bet would be MONEY Best Credit Card winner Blue Cash Preferred. You’ll receive 6% on groceries on your first $6,000 spent, and an unlimited 3% back on gas. Moreover, you’ll receive a $150 sign-up bonus if you spend $1,000 in the first three months, which more than makes up for the $75 annual fee.

RELATED:

Don’t Get Suckered into Signing Up for Store Credit Cards this Holiday

Money’s Best Credit Cards of 2014

RELATED: Money 101: How to Pick a Credit Card

MONEY credit cards

Don’t Get Suckered Into Signing Up For These Credit Cards

retail store financing is a bad deal
Sarina Finkelstein (photo illustration)—iStock

The sales clerk will try to lure you in with discounts and 0% financing—but may not tell you that the card could ultimately cost you more than it saves you.

This time of year, retailers start to turn up the advertising on their promotional payment plans—0% interest for six months! Special financing for a year with a 15% discount on your purchase!

With offers like those, you might be tempted to consider paying for little Sally’s Disney Frozen doll/dress/lunchbox with store financing or a brand new store-specific credit card.

But beware: A new study by CardHub found that many of these promotions have potentially costly caveats in the fine print.

Among the 69% of major retailers surveyed that offered financing options, half currently have what’s known as a deferred-interest plan.

With these payment programs and credit cards, you’re told that you won’t be charged any interest for the first six months or more. But even if finance charges aren’t showing up on your monthly statement, “shadow interest” is accumulating behind the scenes, explains Gerri Detweiler, director of consumer education at Credit.com. Once the grace period ends, consumers who haven’t paid off their balance in full—or in some cases, who have simply made one late payment—will see a lump sum of back interest added to the remaing balance.

Lots of people end up in this worst-case scenario. According to the Consumer Financial Protection Bureau, 43% of subprime borrowers who use this kind of financing are retroactively charged interest on their purchases.

And the missteps can be very costly: The CardHub study found that, under a deferred interest payment plan, paying off your credit card debt one month behind schedule or missing a single payment could increase your financing costs by more than 27 times.

“At that point, you have to give yourself an ‘F’ because you didn’t accomplish anything, you just deferred interest instead of eliminating it,“ says John Ulzheimer, credit expert at CreditSesame.com.

There are other reasons to be wary of retail credit cards, too. A recent analysis by CreditCards.com revealed that the average annual percentage rate on cards was 23.23% vs. 15.03% on general-use cards. And Ulzheimer says the high interest rates—combined with low credit limits—amount to subprime lending terms.

Additionally, store financing can impair your future borrowing prospects if you’re not careful. Low credit limits make it easy to spend close to your maximum, and 30% of your credit score is affected by the ratio of credit used to available credit.

No wonder a recent Credit.com study showed 49% of Americans who opened a store card during the holiday season regret having done so.

That said, retail cards aren’t always a bad idea. The discount or free financing window can make sense for a rare big-ticket purchase; you just have to make sure you understand the terms beforehand. The cash register is not an ideal time to make a decision about opening a new card, Detweiler says, but if you’re stuck in this situation, at least take your time to read the fine print.

Then, put a strategy in place to make timely payments that will cover the cost of the purchase before the grace period ends.

“The way to protect yourself is to divide up the balance by the number of months left, plus a little extra, then set up auto payments from your bank account,” Detweiler says.

Want to know a better way to pay? See our related story on the best credit cards to use for holiday shopping.

RELATED: The Dark Side of Retailer Credit Cards

MONEY credit cards

This Is Why Prepaid Cards Are Still Risky

swiping card
Erik Isakson—Getty Images

You might not be able to recover your money if your card is lost or stolen. The Consumer Financial Protection Bureau wants to change that.

Over the past five years, prepaid cards have become an increasingly popular alternative to debit and credit cards. Last year, 12% of households used the cards, which can be loaded with cash and used like debit cards.

They’re especially popular among millennials, whom surveys have found to be credit card averse and distrustful of financial institutions. More than 25% of people aged 25 to 34 years old used prepaid cards last year, according to a survey from the Federal Deposit Insurance Corporation. And among people without bank accounts—who are typically lower income—27% used them, up from 12% in 2009.

People without bank accounts are also more likely to rely on the cards for critical financial transactions. Almost 80% of unbanked households with prepaid cards used them to make everyday purchases, pay bills, or receive payments. Some even say the main reason they use prepaid cards is to “put money in a safe place” or “save money for the future.”

What these people might not know is they’re taking a risk, since prepaid cards don’t have the same legal protections as other kinds of plastic. Right now, if you lose your prepaid card, or if someone steals your card and uses it, you might not be able to recover all of your money, depending on the terms of your contract.

The Consumer Financial Protection Bureau wants to change that. On Thursday, the agency proposed new rules that would require prepaid cards to offer the same kind of fraud and lost-card protections that credit cards have, along with other kinds of protections.

“Consumers are increasingly relying on prepaid products to make purchases and access funds, but they are not guaranteed the same protections or disclosures as traditional bank accounts,” CFPB Director Richard Cordray said in a statement. “Our proposal would close the loopholes in this market and ensure prepaid consumers are protected whether they are swiping a card, scanning their smartphone, or sending a payment.”

The biggest deal of the new proposal is that it would limit your liability for fraudulent charges. Under the new rule, if your prepaid card were lost or stolen, the most you would pay for unauthorized charges would be $50, as is the case with credit cards.

The new rules would also require that financial institutions send you statements about your balance, offer you opportunities to resolve errors like double charges, and disclose more information about fees, on a form that looks like this. That’s important because prepaid cards sometimes charge high fees for activation, balance inquiries, and inactivity.

The proposal would also add protections to prepaid cards that allow users to overdraw into a negative balance, such as imposing limits on late fees.

The CFPB hasn’t implemented the changes yet. The proposed rule will be open for public comment for 90 days before the CFPB decides whether to issue a final rule.

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MONEY Tech

How Square Will Disrupt the Banking Industry

Square reader
Zuma Press—Alamy

The sky is the limit for Square's still-incipient program.

Some industries are riper for disruption than others. And if there was any doubt about the vulnerability of banks, then Square Capital’s announcement that it has now advanced $75 million in financing to small businesses over the last year serves as a not-so-subtle reminder.

To be fair, Square Capital is still in its infancy. While its latest milestone is an achievement, particularly when you consider that Square’s cash-advance service is only a year old, it pales in comparison to the bank industry’s nearly $8 trillion in outstanding loans.

But, as Square has proven in the payments space, disruption by its very nature begins with a small beachhead from which later offenses can be waged.

An industry ripe for disruption

The fact that so many alternatives to traditional banks have flourished in the years since the financial crisis should come as no surprise given the industry’s well-deserved reputation for running roughshod over customers.

Its list of misdeeds is long and growing. Among other things, the nation’s biggest lenders have been accused of:

  • reordering debit-card transactions to maximize overdraft fees
  • fixing ostensibly neutral credit card arbitration hearings
  • illegally foreclosing on thousands, if not millions, of homeowners
  • manipulating bond, energy, currency, and interest rate markets

And those are just the most widely publicized allegations that come to mind. Consumers and small businesses would be excused, in other words, for welcoming any and all assaults on the bank industry’s traditional stranglehold over the nation’s finances.

Just recently, for instance, Wal-Mart WAL-MART STORES INC. WMT 2.0302% teamed up with Green Dot Bank GREEN DOT CORP. GDOT 1.1085% to offer checking accounts to customers of the retail behemoth, many of whom have been intentionally shut out of the bank industry. Meanwhile, deposits at the nontraditional Bank of the Internet BOFI HLDG INC BOFI 0.7402% have increased from $570 million in 2008 to more than $3.2 billion today — a sixfold spike.

The nuts and bolts of Square Capital

It’s in this vein that Square Capital has begun offering select customers of its payments service the opportunity to acquire financing to grow their business. “Because we process our customers’ transactions, we have a unique insight into the growth and momentum of their businesses that allows us to make smart financing decisions,” Square’s Faryl Ury told me.

Source: Square.

The process works like this: Square identifies existing customers with substantial cash flows, reaches out to them, and then offers financing. But instead of charging interest, Square assesses, in essence, a one-time fee equating to between 10% and 14% of the agreed-upon advance.

I say “in essence,” because the deal is actually structured more along the lines of a repurchase transaction, as opposed to a loan. That is, in exchange for the cash advance, the merchant sells Square a portion of heavily discounted future cash flows, which are designed to be paid back over a 10-month period — though, strictly speaking, there is no set duration, as the financing is satisfied via a remittance of a set percentage of ongoing cash receipts.

Here’s how Square explains it:

With Square Capital, businesses sell a specific amount of their future card sales to Square and in return the seller receives a lump sum payment. Businesses automatically pay Square as a set percentage of daily card sales, so they pay more when sales are strong and less if things slow down. Square leverages its data-driven understanding of each business to develop unique offers for businesses with the expectation that sellers will complete their advance in approximately 10 months, although there is no set time frame.

Suffice it to say, this isn’t cheap financing. Using the 10-month duration as a benchmark, that equates to an average effective annual interest rate of roughly 14.5% — this assumes a one-time fee equal to 12% of the advance.

But what it lacks in pricing, it makes up for in efficiency. As Ury explained, merchants don’t have to spend time filling out applications; Square has already preapproved them. Additionally, advances can often be processed the following business day, while bank loans can take weeks if not months to proceed through the application, underwriting, and funding processes.

The net result is that certain small businesses that are among Square’s best customers have a ready and immediately accessible source of financing to grow or otherwise reinvest in their operations. It’s likely for this reason that “[m]ore than a third of merchants who have completed their first Square Capital advance have renewed for a second round of capital to make additional investments in their business,” according to Square.

The scourge of credit risk

The significance of this move to Square itself can’t be overstated, as it exposes the payments company to credit risk — that is, the danger that cash-advance recipients will default on their obligations. This is new territory for Square, and a lack of respect for its perils has been the scourge of countless financial institutions throughout time.

That being said, one thing Square has going in its favor is access to the payments data of its customers. Additionally, with only $75 million in advances to date, it has been able to tightly control who gets access to funding, presumably limiting financing to companies that are patently capable of managing the liability.

Perhaps most importantly, unlike traditional lenders, Square doesn’t have liquidity risk, which is the precipitating cause of failure of most companies in the financial industry. At present, as far as I can discern, Square is financing cash advances with equity and a recent investment from Victory Park Capital, a privately held investment advisor that specializes in credit and private equity investments.

However, the protection afforded by these fail-safes will be diluted as Square grows its portfolio of merchant financing. At a certain point, it will need to supplement its source of funds. When it does so, it doesn’t seem unreasonable to presume that it will gravitate to deposits, which are exceptionally cheap but carry the threat of capital flight.

Growing Square Capital, moreover, means opening its coffers to less qualified customers, thereby increasing the risk of default. Is this a bad thing? Certainly not, as risk is the price of return in the credit industry. But managing the process will require prudence and humility, as even the most sophisticated risk models can’t tame the cyclical nature of credit risk.

For Square, the sky is the limit

Over the last century, the bank industry has been transformed through countless incremental advancements to the way money is allocated between savers and spenders. Square’s foray into financing can be understood in this context.

The sky is the limit for Square’s still-incipient program. The payments business is big and lucrative, but few things promise the magnitude of profits that can be earned by the adroit allocation of other peoples’ money.

TIME

5 Holiday Spending Mistakes That Can Kill Your Credit

handing money over
PM Images—Getty Images

This time of year can be brutal on your credit score

Now that the holiday shopping season is here (what, you didn’t know Halloween is the new Black Friday?), companies are pulling out all the stops to get us to spend. But watch out: There are some fairly common holiday spending behaviors that can do a number on your credit score. Here’s what the experts say you need to avoid.

Maxing out your cards. In truth, getting anywhere near your credit limit is a bad idea. “Your credit card utilization rate accounts for nearly a third of your credit score,” says Charles Tran, founder of CreditDonkey.com. This percentage of the credit you’ve used compared to how much you have available should be at 30% or less, and if you’re actively trying to raise your score, you should aim for as little as 10%.

This holds true even if you don’t revolve a balance, Tran says. “Even if you religiously pay off your credit card balance in full, the snapshot that the credit report captures might show a high balance, which has a negative impact,” he says.

Loading up a low-limit card. This is a corollary to not maxing out your cards because your credit is scored based on both your per-card as well as aggregate limits, explains John Ulzheimer, credit expert at CreditSesame.com. “The closer your balance is to your credit limit, the lower your credit scores,” he says. If you put $1,000 on a card with a $1,500 limit, that looks much worse than putting the same amount on a card with a $15,000 limit, he says, even though the amount you’re spending and the total amount of credit you have available hasn’t changed.

Ulzheimer notes this is even more important if you plan to pay off your holiday purchases over a number of months, because this maximizes the amount of time you’ll have a harmfully high ratio on the card.

Opening a slew of store cards. Yes, we know — you’ll get 10% or 15% off, or maybe you’ll even be able to jump that insane line on Black Friday. Opening a bunch of store credit cards is still a bad idea. Every time you apply for credit, your score takes a (small) ding, so making your way through the mall filling out applications can cumulatively have a noticeable effect on your credit score.

Closing a bunch of cards. “It can… be damaging to panic and close credit cards because you’re afraid of overspending for the holidays,” warns Bankrate.com analyst Jeanine Skowronski. If you know you can’t handle the temptation, then go ahead and close cards, but this should be a last resort because it can hurt your score because closing a card takes that credit away from your utilization calculation, she says.

Similarly, a lot of people think they’ll sign up for a store card just to get the one-time discount, pay it off and then cancel it. This is really a double-whammy for your score because you ding your credit profile twice, once when you open the card and again when you close it.

Taking the deferred-interest bait. “One marketing strategy that can get folks in trouble is the delayed interest offer,” says Beverly Harzog, consumer credit expert and author of “Confessions of a Credit Junkie.” Not paying by the end of the grace period or even missing a payment could trigger retroactive interest on your purchase, often at sky-high retail card rates. “You’ll owe the interest that would have been charged during that time period,” Harzog says. Not only does this make that purchase ultimately more expensive, it also increases the likelihood you’ll need to revolve that debt, which hurts your utilization.

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