Like most Americans, you've probably noticed a significant increase in the amount of credit card and rewards card offers you've received lately.
Like most Americans, you’ve probably noticed a significant increase in the amount of credit card and rewards card offers you’ve received lately. That’s because the number of offers dispersed through the mail during the second quarter of 2010 exceeded 1 billion, more than double the 419 million for the same period in 2009, according to a report from Mintel Comperemedia, which tracks direct marketing.1 As a physician, you’re likely receiving more than your fair share.
Credit cards and rewards cards are a staple in today’s society, and have been for many years. According to “The Survey of Consumer Payment Choice,” published by the Federal Reserve Bank of Boston in January 2010, there were 176.8 million credit cardholders in the U.S. in 2008, with the average credit cardholder having 3.5 credit cards. About 60% of all consumers had a rewards credit card.2
What’s challenging, however, is wading through the sea of offers to select the credit card or rewards card that is right for you. The card you end up with should be a reflection of your needs, lifestyle, and purchasing habits—and that’s going to be different for every individual. But the process of card selection holds true no matter what your purchasing profile looks like.
Names and interest rates
There were 270 million Visa credit cards and 203 million MasterCard credit cards in circulation in 2009.3,4 The numbers for American Express and Discover credit cards pale by comparison, and stand at 48.9 million and 54.4 million, respectively.5,6 Those numbers, says Joel Ohman, CFP, founder of the Website CreditCardChaser.com, are an important consideration in the credit card selection process.
“A good rule of thumb is to have at least a Visa or a MasterCard, because they’re accepted in more places,” says Ohman, who admits that his favorite is an American Express cash back card. “But some places just don’t take it.” He explains that some merchants may not want to pay additional and/or potentially higher fee schedules for Discover or American Express, and rationalize that, given the lower number of consumers holding either of those two cards, they won’t be losing a lot of business by declining them.
As for interest rates, Christine Moriarty, CFP, president of Vermont-based MoneyPeace, Inc., says that should be less of a concern in your decision-making process, especially if you don’t plan on carrying any balances forward from month to month—a practice she strongly advocates.
“The only time it makes sense to carry the balance from month to month is for someone who gets reimbursed for business expenses,” Moriarty says. That’s because individuals who need to use their credit card for travel may receive their monthly statement prior to being reimbursed. “If they pay the bill in full, most will have to dip into savings or wreak havoc on their household financial system.”
Of greater importance, she says, is to remember that many credit cards, and quite a few rewards cards, carry annual fees, such as the American Express Premier Rewards Card, which comes with a $175 annual fee—another practice Moriarty frowns on. “I may be old-fashioned, but I’m also living in today’s world. And I say an annual fee is not necessary.”
Travel points or cash back?
Are you a frequent traveler, either for business or pleasure? If so, Ohman says it makes more sense to obtain a card that helps you earn points or cash back toward airline tickets, or an affinity type program that offers higher average rewards if you travel on a select airline or stay at a specific hotel chain. Two of the more popular travel rewards cards are the PenFed Premium Travel Rewards American Express card, and the Simmons First Visa Platinum Travel Rewards card. The former awards five points for every dollar spent on airline tickets, and three points for every dollar spent on hotels and dining. The latter awards one point for every dollar spent, with 22,000 points needed to quality for an airline ticket.
For many, however, a basic cash back rewards card will suffice.
“I’m fairly average and I don’t travel a lot,” Ohman says. “If I had to pick, I’m very happy with my plain cash back card. I don’t have to worry about different formulas for calculating ratios and points. I know that if I spend X-amount, I’m going to get 1% or 2% back. People tend to like the cash back cards because of their simplicity.”
Speaking of keeping things simple, Moriarty cautions those shopping around for a credit or rewards card to be aware of credit card roulette, a practice whereby the rewards categories rotate periodically, sometimes quarterly, making it a little more challenging to keep track of which purchases are earning you the maximum amount of cash back. Moriarty tells her clients to steer clear of those types of cards.
“Take that same energy [used to keep track of changing categories] and put it into devising a payment plan to pay off your credit card,” she suggests.
Ohman agrees. He points out that there are two different types of people when it comes to rewards cards. There are certain people who like to be extremely frugal. They like to clip out coupons, they’ll comparison shop, and are the type of people who get the flyer brochures from their credit card company every quarter with the different cash back categories and they’ll schedule purchases, knowing they’ll use one credit card during one quarter for this type of purchase, and another card for another type of purchase the following quarter. But Ohman’s thought process, perhaps similar to that of many physicians, is different.
“For me, my time is money, so I’d prefer not to have to think about all these different categories, and get confused by different formulas and have to remember what to spend during what quarter,” he explains. “It’s hard to keep track of.”
There are a wide range of websites that not only rate different credit and rewards cards, but also enable consumers to compare them side by side, in categories ranging from Introductory Period APR to earnings and rewards potential. These sites include Ohman’s CreditCardChaser.com, as well as LowCards.com, Credit.com, and CreditCards.com. Moriarty says the website she is most familiar with is BankRate.com, and points out that while these sites contain a lot of valuable information, it’s important to know that the source of that information is unbiased.
Ohman says the information under the “Compare Cards” tab on CreditCardChaser.com is probably the most updated information imported directly from the different credit card companies. However, he stresses that “if someone is looking for the absolute gospel, these credit card holder agreements can change all the time.” He suggests that before applying for a credit card, consumers read through the disclosures that are required on every application to make sure they’ve applied for the card that’s best for them.
One category to be aware of when comparing credit and rewards cards is Credit Needed, or the minimum threshold of credit that’s required for obtaining that particular card. Some cards list that threshold as “Good,” while others carry a “Fair” or “Poor” indication. The reason for the low threshold is that some credit cards are specifically designed and marketed toward people with poor credit, giving them an opportunity to rebuild their credit. As such, unless you have less than good credit, it’s advisable to steer clear of those types of cards.
In addition, says Moriarty, the “Poor” rating under the Credit Needed heading could say a great deal about the company offering the credit or rewards card. “You want to stick with a big name company that’s going to be reliable for handling your debt and your money, and for reporting to the credit bureau. Know who you’re dealing with.”
Avoid the pitfalls
One of the biggest mistakes consumers make when they obtain a rewards card, says Ohman, is becoming so focused on the fact that they’re earning 2% cash back on their purchases that they forget to pay their balance in full each month. If your card carries an interest rate of 10% or 12%, failing to pay off the balance each month can negate your cash back rewards for several months. Some credit and rewards cards, however, offer a way to avoid that dilemma.
“My American Express card has a nice little feature where I can log in online and set up an auto pay for the full balance every month,” Ohman explains. “So when I make a purchase it’s just like using my debit card, only better, because I’m getting cash back.”
One very important element in selecting a credit or rewards card, says Moriarty, is to know oneself. “And knowing yourself may include not getting a rewards card. If you know you’re the impulsive type who will buy a lot of things just to get the rewards, you might actually end up spending more money in the long run.”
This edition of Oncology Fellows is supported by Genentech, a member of the Roche Group.