Choosing a Credit Card: Cashback, Miles, and Points

I’m sure all of us have gone out to dinner with a big group and sometimes have that awkward feeling when the check comes. Is that annoying girl who only ordered salad but drank more wine than everyone gonna try and protest splitting the bill? We all hate that. But then there is that other girl, who always wants to pay with a credit card. Sometimes, she even takes other people’s cash and puts their portion on her card.

Sketchy? A little. Savvy? Yes.

After all, if you were going to pay cash, you shouldn’t really care if she puts your part on her card. But, what exactly is she up to?

She’s probably earning cashback, points, or miles (or Mommy and Daddy are paying the bill and she just wants the cash). For those of you with a credit card or planning to get a card, what should you be looking for when signing up for a card?

Getting rewarded for credit card use is only for people who plan to pay off their entire balance each month. (If you don’t plan to pay of your balance each month, then don’t apply for a new credit card.)

Rewards cards come in a few major types:

Cashback

Cashback cards traditionally return to you a standard percentage of your charges, usually in chunks of $50 or $100. For example, the Citibank Dividend card gives you 1% back on all purchases – this is fairly standard among cashback cards. This card also gives you 5% cashback on groceries, gas, and pharmacy purchases.

Some cards will give you additional cashback for purchases at a specific store or other category (like purchases at the post office, restaurants, travel, etc.)

Cashback cards are a great option for those who don’t like dealing with points and other non-monetary forms of currency. They are especially great if you only use them for the bonus cashback categories. Many people will use the Citibank Dividend card, for example, only at supermarkets and gas stations.

Frequent Flyer Miles and Hotel Points

Almost every airline and hotel chain in the world now has an airline branded credit card that offers miles for purchases, usually one mile per dollar spent. Many airlines even offer bonus miles just for signing up. The Delta Skymiles American Express offers 15,000 miles when making the first purchase.

A caveat about mileage cards: frequent flyer miles are depreciating currency. Airlines are becoming stingier when it comes to redemption, allocating fewer award seats than ever before. A mileage card is probably best for those who fly frequently and really understand how the airline program works or for someone who needs the bonus miles for signing up to redeem a ticket soon.

Many mileage cards charge an annual fee, though some do not. Check the terms of the card carefully so you know how mileage accrues, when it expires, and all of the other small print. Hotel point cards usually don’t have a fee, but be sure you have something in mind about what you would use the points for.

Charity

Many charitable organizations, universities, and advocacy groups offer a branded credit card now. A percentage of your contributions is given to the organization.

It feels awful to write this, but charity-branded cards are actually not a good idea. You are better off getting a cashback card and sending those proceeds to the charity of your choice. Not only can you get a tax deduction this way, but you may also have more choice about the specific program within the organization or university you wish to support.

Other Points and Rewards

There are a whole other range of rewards cards. If you are an avid shopper at a specific store, they might offer a card where spending leads to gift certificates. Sports team-branded cards might get you invitations to special events. Whatever the card, see if the rewards are something you actually value and would use. If the terms are right, then go for it.

If you are getting points or miles or other rewards, you should try and get a card that gives you about 1.5 cents per dollar you spend in rewards. If you plan to spend $10,000 this coming year, make sure that you value the rewards from a potential card at about $150 or more.

Beware of annual fees. Be sure to subtract out any annual fee from the rewards you expect.

Check the amount you need to spend to get the rewards. If the cashback card offers you 2% back, but the minimum reward is $500, figure out if you really plan to spend $25,000 on the card. This is especially true for point cards.

Finally, do not get a rewards card if you don’t plan to pay off the balance in full each month. These cards usually have higher interest rates and fees for late payments and going over your limit.

If you are looking to sign up for a card, search the web for offers. Check the airline, hotel, and stores you use most to see if they offer a branded card. Carefully look at the terms and conditions, and see if you actually value the rewards before you sign up.

Even if you don't have a rewards credit card, making charges and paying them off helps to build a good credit history. So next time you're out with a group of friends for dinner, if someone is being annoying by using a credit card, throw yours in too.

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Choosing a Bank: 'Brick and Mortar' or Virtual?

I recently gave a check to a friend for several hundred dollars. While most would expect to hear a "thank you," his response was, "What the hell is Umbrellabank?"

I explained to him that it was a virtual bank which solely operated online. He asked a lot of questions, including:
"How do you know they are real?"
"Where do they keep the money?"
"Aren't you afraid about keeping your money on a website?"

All of these questions are actually the wrong questions, since they seem to indicate a general misunderstanding about how banking works. There isn't a big vault where you can swim in gold coins like Scrooge McDuck could do. Virtual banks are all FDIC-insured, so there isn't a worry about losing all of your money if the bank shuts down.

Though virtual banking offers a lot of advantages, it is definitely not for everyone. Here are some factors you should consider when deciding between a checking account at a virtual bank or at a traditional brick and mortar bank.

Do you deposit a lot of checks or cash?
While most people usually have direct deposit for their paycheck, those who need to deposit cash and checks often may want to keep a brick and mortar bank account. Virtual banks usually process deposits via mail and ATM. A lost envelope or an ATM error could lead to a major delay in accessing your funds.

If you live paycheck to paycheck and you don't have direct deposit, there will be a small delay between your deposit by mail and the processing of that deposit, which will not allow you to have access to your funds immediately.

Do you plan to move in the short term?
For people who move often, sticking with a virtual bank can save a lot of hassle. No matter where you live, you'll have the same access to your bank.

Do you frequently use ATMs?
Those who travel or use ATMs often will probably benefit from virtual banks who generally automatically reimburse you for any fees you incur.

Do you like to yell at bank tellers?
Some people like the peace of mind of being able to talk to someone in person when they are having problems with their bank account. Brick-and-mortar banks are good for these people. (Though, virtual banks don't have the same reputation of randomly asessing exhorbitant fees, leading to fewer confrontations)

Do you need to keep a low minimum balance?
Many virtual banks have no or low minimum balances but still offer competitive interest rates. If you have plenty of cash but don't think the interest rate is worth it, stick with your brick and mortar.

Do you like to pay bills online?
Most virtual banks offer free bill-paying services, where they will electronically or physically send a check to anyone you choose. Brick and mortar banks often charge for this service.

For young people who are more mobile and tech-savvy, virtual banking is usually a better fit. For the past six years, my bank has provided me with free checks, bill paying, ATM reimbursements, no foreign exchange fees, no minimum balance, free transfers to money market accounts, and very competitive interest rates. I'm honestly not sure how to rate the customer service, because I haven't really had any difficulties.

Brick and mortar banks have a lot of overhead, so they tend to pass on those costs to customers in the form of fees and inconvenience. But for some people, sticking with a traditional bank might make sense. However, there is no evidence that traditional banks are any more safe from identity theft or fraud than virtual banking.

If you're thinking of switching to a virtual bank, browse Bankrate.com's checking and savings account current rates. In addition to Umbrellabank, there are many unfamiliar names in this market, like NetBank and iGObanking, but also some of the more recognized companies, like Citibank and HSBC. Be sure the terms fit your needs, and make the switch.

The real benefit to virtual banking is connecting your checking account to a high-yield money market or savings account, which will be discussed in a future post.
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