Monday, November 19, 2007

Credit cards that help you save

Use these reward cards right and you can fatten your savings, retirement and college accounts. Or use them wrong and wind up further in the hole.

Every little bit helps. Except when it doesn't.

A number of financial institutions now offer reward cards that promise to help you boost your net worth by contributing to your savings accounts, your retirement plans, your college funds or even your mortgage.

In fact, two recent entries into this field, Bank of America's "Keep the Change" debit card program and American Express One's "Savings Accelerator," are being marketed as an antidote to our nation's miserable personal savings rate (we just dropped below zero again).

Each of these cards, however, has traps for the unwary that could undo most or all of the benefits they promise. You should read the fine print of each offer, note how rewards are accrued and refrain from carrying balances; otherwise, any benefit you get from the savings-reward program will be more than wiped out by interest costs.

Furthermore, there's no card that is best for everyone. The right rewards program depends on how much you spend and other details of your financial life, like where you keep your retirement money. The Fidelity Investments reward cards, for example, are favorites of Curtis Arnold, who runs the Web site. But their generous rebates won't be much help to you if you're not a Fidelity customer.

Even at their best, none can take the place of a disciplined savings and investing strategy. You still need to save on your own for retirement, college and emergencies; these cards can, at best, add a few bucks a year to those efforts.

Here's what you need to know about the most widely available programs:

Bank of America's Keep the Change

Annual fee: None

APR: None (program is linked to debit card)

Grace period: Not applicable

How it works: Your purchases are rounded up to the nearest dollar and the excess amount -- from 1 cent to 99 cents -- is debited from your checking account and deposited into your savings account. So if you use your debit card to pay for a $3.21 latte, Bank of America debits $4 from your account and sends the extra 79 cents to your savings. BofA provides a 100% match for the first three months on these transfers and a 5% match thereafter.

Limit: $250 a year

The catch: There are a few. You may incur a slightly greater chance of overdrawing your account, especially if it often runs on fumes. Your savings could be reduced if your bank or merchant charges fees for debit transactions. Also note that the match isn't very generous after the first three months; you'd have to rack up at least 5,000 transactions a year, or about 14 a day, to hit the $250 maximum, so most of what you'll save will be your own money.

A good match for: Bank of America customers on debit purchases they would make anyway.

Their pitch.

American Express One Card's Savings Accelerator

Annual fee: $35 (waived the first year)

APR: Currently 12.99% to 14.99%, depending on credit history

Default rate for late or overlimit accounts: Currently 28.99%

Grace period: 30 days

How it works: American Express deposits 1% of your purchases into an FDIC-insured high-yield savings account (current return 3.5%) run by its affiliated bank.

Limit: None

The catch: That annual fee. Sure, it's waived in the first year and further offset by a $25 sign-up bonus deposited into your account. But after that, the savings from your first $3,500 in annual spending are eaten up by the fee. Most light to moderate spenders (annual charges of $30,000 or less) would be better off with a card like Citibank Dividend Platinum Select, which offers a regular 1% cash-back rebate on all purchases (rewards are capped at $300 a year).

A good match for: Big spenders who aren't interested in the Fidelity offerings (see below).

Fidelity Investment Rewards MasterCard

Annual fee: None

APR: 12.15%

Default rate: 19.99%

Grace period: 25 days

How it works: Fidelity deposits 1.5% of your purchases into a Fidelity brokerage or retirement account.

Limit: $1,500 a year

The catch: You typically need $2,500 to open a Fidelity account; account maintenance fees may apply if your balance slips below that level.

A good match for: Fidelity customers. The 1.5% rewards rate is better than most cards and applies right from the start (unlike many regular cash-back programs that have a tiered system, offering just .5% on the first $1,000 of spending, 1% on the next $2,000, and so on). The high limit (you'd have to spend $100,000 annually to hit it) makes it a particularly attractive choice for high-spending folks who might run into the lower caps set on other rewards cards.

Fidelity Investments 529 College Rewards Card

Annual fee: None

APR: 15.24%

Default rate: 19.99%

Grace period: 25 days

How it works: Fidelity deposits 2% of your purchases into your Fidelity-run 529 account.

Limit: $1,500 a year

The catch: Fidelity currently operates 529 plans in Arizona, New Hampshire, Delaware and Massachusetts. They're OK plans, but the rewards card isn't enough reason to move your money from another plan -- particularly if you live in a state that offers tax breaks for contributions. (For more on 529 plans, see the College Board site's explanation.)

A good match for: Current Fidelity 529 plan customers. Like Fidelity's Investment Rewards program, the 529 College Rewards benefits light to moderate spenders because its rewards aren't tiered, and big spenders because you'd have to spend $75,000 to hit the cap on rewards.

Citi UPromise Platinum Select MasterCard

Annual fee: None

APR: 12.99%

Default rate: 30.99%

Grace period: 20 days

How it works: Citibank deposits at least 1% of your purchases into the 529 plan of your choice. The reward rate for gas purchases is 2% and the rate for certain grocery and drug store items is up to 10%. The credit card and applicable retailer-issued loyalty cards must be registered at UPromise.

Limit: $300 a year for regular purchases; no limit on selected grocery and drug purchases

The catch: The default rate is severe and the grace period is short, so people who occasionally space on paying their credit card bills shouldn't apply. Also, some people feel weird about registering credit cards and retail loyalty cards at a third-party Web site like UPromise, which shares information about customers with its affiliates (unless the customers specifically opt out).

A good match for: Non-Fidelity 529 plan savers who have read UPromise's privacy policy and who don't charge more than $30,000 a year.

Stockback Visa Credit Card from MBNA

Annual fee: None

APR: 9.9%

Default rate: 19.99%

Grace period: 25 days

How it works: The tiered rebate schedule depends on your monthly spending: 0.5% for the first $1,500 spent, 1% for the next $1,499, 1.5% for the next $2,000 and 2% for amounts over $5,000; no rewards for spending over $6,000 a month. Stockback deposits rewards in an investment account of your choice.

Limit: $120 a month

The catch: Unlike most tiered rebates, which are based on annual spending, this convoluted plan starts over every month. Your effective rebate rate, if you hit the $6,000 monthly maximum, is 1.21%; if you spend much more or much less, your effective rate drops precipitously. Also, Stockback is run by the same company that runs BabyMint and NestEggz, so you'll want to read the privacy policy and be prepared for targeted advertising by affiliates.

A good match for: Those who spend between $5,000 and $6,000 a month. Lighter spenders are probably better off in a regular cash-back card that gives you at least 1% on all purchases; bigger spenders might want to check out American Express One or NestEggz (below).

NestEggz Platinum Plus MasterCard from MBNA

Annual fee: None

APR: 9.9%

Default rate: 19.99%

Grace period: 25 days

How it works: NestEggz offers 1% rewards on purchases (and 3% on gas until Dec. 31, 2005) to be deposited in the retirement account of your choice.

Limit: None on regular purchases, $3 a month on gas

The catch: Like Stockback and BabyMint, the NestEggz program shares aggregated, non-personally identifiable information with affiliates so they can market their products to you.

A good match for: Those looking to boost their retirement savings and big spenders who aren't Fidelity customers and who want a MasterCard rather than an American Express.

Citi Home Rebate Platinum Select MasterCard

Annual fee: None

APR: 13.99%

Default rate: 30.99%

Grace period: 20 days

How it works: Citibank applies 1% of purchases toward the mortgage of your choice.

Preferred format:

The catch: The short grace period and high default rate can be a trap for folks who aren't diligent about paying on time. Also, most people have better uses for their money than paying down a low-rate, potentially tax-deductible mortgage.

A good match for: People who have already paid off all their other debt, met their retirement and other savings goals and still want to reduce their mortgages.

By Liz Pulliam Weston

1 comment:

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