Saturday, July 12, 2008

Not To A School's Credit

Florida State University isn't the only school to have an "affinity card" -- that is, a deal to let a bank use school colors to promote a card in exchange for a kickback to the school from fees generated from card use -- but it may be the first one to have its deal publicly outed. The millions FSU is guaranteed by its contracted affinity card issuer are a surefire reason you will certainly find that bank's agents pushing cards to students right on the campus (which apparently leads students to conclude the cards are endorsed by the school, reducing students' scrutiny of terms, and leaving the suckers worse-off than those holding cards found off-campus).

Ignoring the power of directly marketing cards to suckers, let's look at why a consumer would pick a specific card. Things like a high credit limit, low interest rates (but this is only interesting to suckers who will carry a balance), and wide availability (which any card bearing Visa or Mastercard will get, and to a lesser extent American Express) are plusses. Given the fact every bank pushing a card is offering a Mastercard or a Visa, though, how will you pick?

When Discover was first launched, the big deal was getting cash back from purchases. Up to 1%!* Other issuers decided this was effective marketing and piled in. Discover then initiated its Discover Private Issue card to try to capture and keep high-rollers who wanted additional feautures, and paid them a higher cash-back percentage -- "up to 2.5%". That was a fat deal, let me tell you. In fact, it proved too good to customers for the issuer to afford; the card was discontinued long enough ago that Discover's own links answering questions about conversion of the cards to regular Discover cards now lead to missing-page notices. And this little story serves as a parable: card issuers can only pay out so much as an incentive before they have to turn to other tricks to compete.

Some cards offer low interest rates, in the expectation of making money on the fees received by the issuer when the card is used. Obviously, in a scheme like this an issuer has to have confidence in the card holder's eventual payment, as low interest rates limit issuers' ability to absorb bad accounts without experiencing a net loss. In the case of American Express Centurion Card (the "American Express Black Card"), for example, the gimmick isn't cash-back (holders pay thousands a year for the card) but personalized services and the ability to wow onlookers by brandishing a card known only to be issued to those spending over a quarter of a million dollars a year on the card, and willing to pay for the privilege.

The school affinity card is part of the same game: they don't buy you off, they trade on your school spirit (after buying off your school, which is how the bank got your name and address). And since all the issuers would like access to the school's alumni lists, there's significant competition for the school's business. Thus, it's not you the issuer is buying off, it's your school. (Or your professional association, or what have you.) Your affinity card gives you airline miles or reward points or multilevel marketing points, you're doing better than just being able to flash to the world your membership in the AMA (not to be confused with the AMA), but you are still being taken for a ride. The "donation" you make to your organization of choice isn't going to yield you a receipt or a tax deduction, for example, and you have little control of the way your funds are spent. Donating to your school, you can decide whether you want to give it to the chair of the physics department rather than risk the money being used to subsidize an overpaid-but-losing football coach's next off-campus birthday party.

Since the amount of credit card fees you will generate in a year isn't unlimited, a card whose appeal is based chiefly on your rewards will be paying you less if your school, professional organization, church, bike club, or scouting group is getting a cut first. If you want to make a donation, make sure you know what they're getting by doing it from your own pocket. That way, if you itemize on your taxes, you can also get a tax benefit by getting a receipt. To repeat: if your school's name is on the card, you are being shorted when your reward is being calculated. Or they're screwing you on the interest rate. Or they're stealing you blind in fees. Or they're averaging several months' balances to calculate interest due so you can't escape interest by paying off the card once you have paid interest once. There are lots of ways to turn lazy card use into revenue if you control card agreement terms, and with only so much money to go around, anything shared with your school has to come straight out of your pocket.

Do what the school should have taught you to do anyway: think for yourself.

Specific Cards
How much can you make on card rebates? I've never found converting miles into dollars make for a very favorable result, so I suggest picking a card that pays cash. Some finds I've made:

Advanta Business --
These guys are dogs. Advanta was one of the first banks to hire data mining experts to maximize their customer revenues by mathematically analyzing customer behavior. However, Advanta has a business card that offers 5% back on utilities and fuel, though it's subject to a fairly low monthly ceiling. My advice: get the card, put your phone, internet, electricity, and other utilities on the card and don't carry it. This way, you avoid hitting the 5% cap. If you find you hit the cap, remove a bill from auto-pay on this card. Pay the thing monthly.
The trick? the cash pack is paid only when you request it. That is, they will may it more than once a year, but will pay it less if you never notice you're entitled to it. Whenever they owe you $50 you can ask for it. It comes in your next bill so it blends in with the papers you are throwing out because they are redundant of data available online. Make sure you look at this stuff after you've requested the check.

Discover --
Although Discover has ditched its 2.5% back deal for all charged purchases, it does offer special 5% deals for certain types of purchases, which vary with time of the year. Some months, it includes prescriptions. Other months, fuel. If you pay attention you can game it. Don't bother to use it outside the special categories that pay 5%, because you can do a lot better than 1%. Bonus: the 5% specials aren't tied to meeting the silly threshold that bars you from getting 1% back from the first dollar spent. Your reward can be credited to your account; click to redeem accumulated awards, which are spelled out on your online account information page.

American Express --
American Express offers a diverse array of cards, some of which aren't suitable for the user who wants no fees and wants cash back. However, AmEx has figured out that there is a subset of this frugal demographic that is worth having as a customer, and for that customer they offer Blue Cash. Like the old Discover cards, you have to look behind the "up to 5%" rhetoric to get the real cash back amount.
After you spend above a certain threshold you get 1.5% or 5% depending what category of purchase. The 5% category includes groceries, fuel, and pharmacy purchases (though not at Costco, WalMart, or Target) you will be buying all year long. Put these on the Blue Cash. The downside? If your annual expenditures are slight, you will never get to the 5% bracket, which currently requires expenditures exceeding $6500 within a membership year (based on your anniversary date, not the calendar year; before hitting the threshold, you are paid a lower rate). However, if you are paying your tuition and auto insurance on the card, you can quickly push your spending into the right range. If you spend a lot that can be put on a card, you may discover this is your main card.
AmEx pays cash rewards once annually after your anniversary date.

Chase Mastercard --
Chase offers several cards with cash back features that give a flat 1% back (better than other cash-back cards before you've hit their threshold) but offer a 3% rebate on certain expense categories. I have a Chase business Mastercard that gives me 3% back on restaurant purchases, for example. Needless to say, I use it whenever I'm at a restaurant. The fact that it gives 3% back on fuel isn't exciting in view of AmEx' 5% rebate on fuel, but unless it's a month Discover is giving 5% back on restaurants, I wouldn't use a different card at a restaurant. Other 3% deals I've seen on Chase cards include things like home improvement, office supply stores ... there's quite a bit you can do on the 3% deal. Note: the 3% categories have some kind of ceiling before they revert to 1%, but you never get less than 1%. Certain cards pay 3% based on the categories in which you do the most spending. Check the rules for the specific card for which you apply, so you don't get surprised.

CaptalOne --
This isn't about cash back, it's about not getting the shaft when you travel abroad. Both Visa and Mastercard charge a percent surcharge for international transactions, and card issuers commonly add another two percent surcharge for foreign transactions, so when all the dust settles you are paying a 3% penalty for crossing borders. American Express isn't better: the card agreement's definition of the currency exchange rate includes a 3% surcharge, putting you in the exact same place.
CapitalOne doesn't charge a 2% surcharge for foreign transactions, and it eats the 1% fee charged by the branding company for international use on the card network. Instead of being dinged 3%, you pay what you expect. CapitalOne has a rewards structure I don't really understand, but it's paid me some cash atop the 3% tax I avoided using the card abroad, and though it's not the biggest cash back you will see it's the biggest avoidance of foreign transaction penalties you will see.
Seriously consider using CapitalOne if traveling abroad. Then, to avoid trouble with the fraud detection unit, warn them when you travel so your charges aren't declined. I learned that one the hard way, and I pass the wisdom along to you, gratis.

But I Love Miles When I Eat Out!
There's hope! You can take any of the above cards and register them with Continental's OnePass Dining by Rewards Network and get both cash back and one mile per dollar (including the tip, ka-ching). In Houston, the network includes some favorite restaurants: The Black Walnut Café and The Mockingbird Bistro. By registering my Chase and Discover cards with the OnePass miles program, I've gotten 3% or 5% rebates plus one mile per pre-rebate dollar spent at the restaurant. This is pretty slick for an expense you wanted to make anyway.
And yes, it does make me suggest these restaurants. There are few better (Mocking bird isn't cheap, but it's got terrific food, hard to describe in a post about credit cards), and it's great to get a price break at a favorite restaurant.
It inclines me to return again soon :-)

Your school thinks you are a revenue source. That's why you get calls and mailings for donations. That's par for the course. But don't fall into the trap of taking the school-logo credit card, though. If you want to show your school spirit, donate personally. If you want to donate from card use, just donate your cash back checks.
The one reason to prefer a miles card over a cash card is the possibility that the miles card will let you buy your way into using a higher-end lounge than you'd normally access at your miles tier. This is only a big deal if you fly too much to tolerate the normal lounge, but you don't get enough miles on one airline to use its high-end lounge. Here, you're choosing to sacrifice money for quality of life. It's not because miles are better, it's because you like the non-cash benefits and are willing to pay extra to get them.
If it's true that the average college senior has four credit cards, you won't be out of line to have several cards to game their rewards rules. Some cards are good for some things, and it's fair to use a Sharpie to write "FUEL" or "FOOD" on a credit card. It's all about the Benjamins.
Refusing your school's affinity card won't keep your school from its contractual minimum payments, and it won't prevent the school from receiving your intended donations. Make your voice heard when you donate, and do it yourself.

* The Up To 1% line turned out to be bogus; the formula ensured nobody ever got 1% of their annual purchases in cash back, because the top rate was 1% and it only applied after a certain level of purchases had been credited at 0.25% and 0.5% tiers and so on. If you graphed total cash back as a percentage on the Y-axis and annual charges on the X-axis, you could push X to infinity and never actually hit 1%. The kernel of truth in the ad, and its saving grace from a consumer fraud suit, was that one could get 1% on the last dollar charged, if one charged enough. However, the ad's implication was that folks should imagine getting 1% back on their annual charges, which wasn't realistic -- especially for small-spending students, and especially in a world in which merchants weren't accepting Discover at anywhere near the frequency of Mastercard or Visa or even American Express.

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