This article originally appeared on SmartMoney.com
In the battle of the plastics, credit cards have lately emerged as the surprise champs, offering fewer fees and better rewards than the typical debit card. But as banks and credit-card companies flood mailboxes with a new round of offerings, experts warn that finding the best deals isn't getting any easier.
Until recently, debit cards offered a one-two punch credit cards couldn't match: a convenient way to access money without the fear of going into debt, along with generous reward programs. Banks, however, have cut back on those rewards over the past year -- and in some cases have imposed new fees -- while credit-cards issuers continue to sweeten the pot. During the first quarter, companies offered 0% promotional rates on credit cards for ten months on average, up from about seven months a year ago, according to CardHub.com, a credit-card comparison web site. Meanwhile, several issuers have eliminated fees: Discover, for example, dropped charges for cardholders travelling abroad, while Chase eliminated the balance transfer fee on its Slate card during the first month the card is opened. And initial cash-back bonuses have jumped to as high as $250, compared to $100 last year.
The new incentives are all part of issuers' efforts to make credit cards the go-to swipe option for consumers in light of recent regulations. The Durbin amendment, which went into effect last October and is part of the Dodd-Frank Wall Street Reform and Consumer Protection Act, lowered the fees banks receive from merchants when consumers swipe their debit cards, but doesn't impact fees for using credit cards. Banks say this change will cost them an estimated $6.6 billion a year in lost revenue. To make up for the loss, experts say that banks are trying to lure consumers to credit cards by making them more rewarding while making debit cards less desirable. "With debit cards, there are no resources to offer rewards as much as there were before the Durbin amendment -- it removed that incentive," says Nessa Feddis, vice president and senior counsel for regulatory compliance at the American Bankers Association.
While the offers on credit cards are better than they've been in the past, experts say consumers still need to be aware of the perennial drawbacks. Interest rates could rise in the future, or new fees could be imposed. The risks are even higher for cardholders who don't pay their balance in full each month. "What they're banking on is that you'll mess up," says Bill Hardekopf, chief executive at LowCards.com, which tracks credit-card offers.
For consumers who pay off their balances each month and make all payments on time, however, now may be the time to choose credit over debit, says Odysseas Papadimitriou, chief executive at CardHub.com. On top of earning rewards, responsible cardholders will also boost their credit scores. Separately, as data breaches grow in scale -- last month, for instance, it was revealed that up to 1.5 million MasterCard and Visa cards may have been compromised -- consumers may find they're more protected with credit cards than with debit cards. Fraudulent credit card charges are forgiven by banks, but with debit cards, card holders could be on the hook for hundreds of dollars, if not more.
And unlike the days of frozen credit following the market meltdown of 2008, consumers have plenty of offers. Card issuers mailed nearly 4.1 billion credit card solicitations last year -- a record high and up 44% from the previous year, according to Ipsos Mail Monitor, which tracks credit-card mailings. Still, only select number of cards are truly consumer-friendly. SmartMoney and a team of experts dug through the cards to find the best new ones with relatively low rates, long-lasting promotional offers and generous rewards.
Longest 0% APR Periods
There's little reason to pay interest with a new credit card, say advisers, especially for cardholders who have high credit scores. Most card issuers are touting 0% introductory rates on purchases and many are extending the no-rate period. It's as long as 18 months with some cards, like Citi's Platinum Select MasterCard, Diamond Preferred and Simplicity cards. With the Discover More card, consumers can get 0% APR for 15 months. And the Capital One Prestige credit card provides the 0% rate until June 2013.
Beyond purchases, these cards also offer 0% rate on balance transfers for the same period of time. Consumers who are paying down a credit-card balance with a high interest rate can transfer that amount to a new card using a balance transfer offer. These cards, though, charge a 3% fee on that amount -- roughly the industry average. An exception is the Slate card from Chase that offers 0% APR for 15 months and doesn't charge a balance transfer fee when the transfer is made during the first 30 days that the account is open. It also has a 0% rate on purchases for 15 months.
Advisers recommend that consumers pay down their balances during the card's 0% introductory periods. Otherwise, they'll incur interest rates, which with these cards range between around 11% and up to 22%. Hardekopf says consumers should consider the rate they'll pay once the promotional period is over. In general, these cards have been raising their regular rates. For instance, the average rate on a card with a 0% intro rate on balance transfers was 16.6% during the first quarter, up slightly from 16.1% a year prior, according to CardHub.com.
Most Affordable Cards
For consumers with "excellent" credit, which is typically a FICO score of at least 720, the average credit-card rate was 13% during the first quarter of the year, slightly up from about 12.5% a year prior, according to CardHub.com. But some cards charge significantly less. The First Command Bank Platinum Visa credit card has an interest rate of 6.25%, the First Federal Bank credit card charges 7.15%, and the IberiaBank Visa Classic card has a starting rate of 7.25%. The cards don't charge an annual fee.
On the other end of the spectrum, consumers with dinged credit reports (typically with scores below 620) and college students who are trying to build a credit history, there are so-called secured credit cards. To get a secured card, a borrower gives the credit-card issuer what is essentially a security deposit, usually at least $200, which establishes a line of credit. The activity on most of these cards is reported to credit bureaus each month like a regular credit card, says Papadimitriou, which means it can help build credit.
The Orchard Bank Secured MasterCard charges a 7.9% interest rate and an annual fee of $35 that it waives for the first year. And the Applied Bank Secured Visa Gold card charges 9.9% and a $50 annual fee. In contrast, a borrower with poor credit who manages to get a regular credit card will likely pay more than 20% in interest, experts say.
Most Generous Cash Back Rewards
Credit cards with cash back rewards offered a minimum rewards rate of 1% on average, though it was as high as 2% in the first quarter, according to CardHub.com, compared to 1.25% a year prior. Meanwhile, more cards over the past year have been offering a so-called initial bonus, which is free cash for opening a new card and spending a certain amount during the first few months. The average initial bonus is $57.42, up from $28.82 a year prior. And it runs as high as $250 compared to $100 a year ago.
Most credit cards offer a tiered rewards system where some purchases earn more than others. The Blue Cash Preferred card from American Express offers 6% cash back on supermarkets, 3% at gas stations and department stores, and 1% on everything else. The downside: the card has a $75 annual fee. (A similar card offering 1% to 3% rewards doesn't have an annual fee.)
Other cards offer comparable rewards, though they rotate categories every few months. Advisers say that can be a nuisance for consumers who will have to plan purchases in advance in order to maximize rewards. The Chase Freedom Visa card offers 5% on up to $1,500 in purchases of different categories, like gas stations, restaurants and airlines, every three months. It also has 1% cash back on all other purchases. The Citi Dividend Platinum Select Visa card and the Discover More Card have similar models. Most of these cards (Discover is an exception) offer $100 to $200 in cash back after spending $500 or more in the first three months.
Approximately 80% of consumers are using credit cards to pay at the pump, and that figure will increase if gas prices continue to rise, says Ben Brockwell, a director at the Oil Price Information Service. While they won't offer immediate savings, some credit cards provide generous rewards for swiping at the pump. The Platinum Rewards credit card by the Pentagon Federal Credit Union gives 5% cash back on all gas purchases. The card doesn't have an annual fee, but consumers pay $15 to join the credit union if they don't qualify for membership. American Express' Blue Cash Everyday Card offers 2% rewards at stand-alone gas stations.
Warehouse club members can tap into savings two ways. Costco shoppers (membership costs $55 a year) can sign up for the TrueEarnings card from Costco and American Express, which offers 3% cash back on all gas purchases up to $3,000 and 1% thereafter. Costco sells gas at select locations that can be cheaper than nearby gas stations. For instance, a Costco in Waterbury, Conn. charges $3.99 a gallon for regular gas while a CITGO station that's less than three miles away charges $4.13.
Small Business Cards
At least a dozen new small business credit cards have launched since last year, and experts say banks are jumping into this space partly because the cards were excluded from the CARD Act of 2009 that outlawed random interest-rate hikes and other practices on personal cards. For instance, on consumer credit cards, issuers can't raise the interest rate on existing balances unless the cardholder is at least 60 days late with a payment. But on small business cards, issuers can change it whenever they'd like. Separately, interest rates on small business credit cards are slightly higher than consumer cards -- 15% vs. 12.3% -- though the cards tend to offer more generous rewards. For their part, banks say they've been expanding into this field to tap into the growing number of small businesses.
Experts suggest small business owners use a mixture of plastic: For purchases that won't be paid in full each month, consider using personal credit cards where there are more protections. And consider swiping small business credit cards for purchases that will be paid in full each month to avoid potential risks, says Papadimitriou, while earning more rewards.
Capital One's Spark Cash card offers 2% cash back on all purchases. (It's Cash card for consumers, in contrast, offers 1.5% cash back.) And in many cases, the cards are designed to provide more rewards for routine small business expenses and big-ticket purchases. Bank of America's Cash Rewards for Business card offers 3% cash back at office supply stores and gas stations. Chase offers 5% back on the first $25,000 spent with its Ink Cash card at office supply stores and telecomm and cable services each year.
These cards tend to be more useful since they dole out rewards for gas purchases made anywhere, says Hardekopf. But for gas station loyalists, the Exxon/Mobil MasterCard gives a 15-cent fuel rebate per gallon at its stations and the Marathon card doles out five to 25 cents a gallon depending on how much gas the cardholder purchases. But these cards have very high interest rates that range between 17% and 27%.
To be sure, consumers can get immediate savings at the pump by paying with cash rather than plastic. Many gas stations charge about five to 10 cents less for cash payers than they do for those who pay with debit or credit cards, says Jeff Lenard, vice president at the National Association of Convenience Stores, which represents gas stations. But the discounts still aren't big enough to outweigh the savings consumers would ultimately see from credit-card rewards: At $4 a gallon, if the discount to pay with gas is less than 20 cents, consumers will save more with the PenFed card's rewards. If the discount is less than 12 cents, the Costco card will also be better.
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