If you follow credit card offers like I do, you might have noticed that this past year was particularly exciting. Credit card issuers have been heavily marketing products in search of customers, spending more advertising dollars per customer than they have in recent years, and increasing rewards for the best customers. For individuals who have mastered their own financial situation, this has paid off with cash back incentives and free flights through travel rewards, while customers who have just begun the path to getting out of debt could use 0% APR balance transfer offers to save money.
Not everyone benefits from the best credit cards, however. It’s easy to fall into issuers’ traps. Don’t try to beat the credit card issuers at their games unless you’re prepared to lose.
2012 will be an interesting year. It’s impossible to predict specifically what will happen within the credit card industry, but you can be sure the issuers will continue to compete aggressively for new business and offer the best deals to customers with the best credit. If trends continue, here are the offers I expect to be the best credit cards of 2012.
The best cash back credit card of 2012
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Many Consumerism Commentary readers have written in to let me know that they recently received a check for about $98 from Bank of America. This check is not a result of the Bank of America overdraft fee class action lawsuit, but it is the result of a similar lawsuit. First of all, the overdraft lawsuit has only recently entered an appeal process. It could be another year or more before customers see any benefits from this latest class action.
The check is the benefit that customers are receiving due to an earlier class action lawsuit, Closson v. Bank of America. Customers who are eligible had a Bank of America, Fleet Bank, LaSalle Bank or U.S. Trust Company debit card and paid an insufficient funds fee, overdraft fee or similar fee before December 31, 2007. In order to receive a benefit, customers would have needed to file a claim form before May 1, 2009. The deadline to receive any benefits has long since passed, so even if you fit this description, it is too late to become a member of this lawsuit.
This is one of many class action lawsuits against Bank of America, some of which pertain to companies that were purchased by the bank, like Countrywide Financial.
- Ross, et al. v. Bank of America, et al. This lawsuit pertains to the bank’s forcing of customers into mandatory binding arbitration, much like Wells Fargo is doing today. This is a new class action lawsuit.
- Closson v. Bank of America. This is the class action lawsuit I described above. Bank of America encouraged its customers to use debit cards that were designed to increase the number of fees. If you received a check in December 2011, it is likely a result of this lawsuit.
- Bank of America overdraft lawsuit. Nearly 1,000 Consumerism Commentary readers have offered their thoughts about Bank of America’s processing of customers’ debits in a certain order that ensured that they could maximize fee revenue from overdrafts. Read more here.
- Homeowner lawsuits. Class action lawsuits in several states, including California and Washington, allege that Bank of America or its related companies withheld taxpayer money designed to help homeowners facing foreclosure.
- Foreign currency conversions. Bank of America was one of many defendants (also including Visa, MasterCard, Chase, Citibank, and more) in a class action lawsuit regarding a conspiracy to set fees for foreign currency conversions, eliminating competition in this particular aspect of business.
Class action lawsuits are usually settled by the defendants, often without admitting any wrongdoing. As a result of settlement, affected customers often only receive a small award while the lawyers representing the class receive significant payments for their work and time. For example, in the overdraft fee settlement, lawyers will receive $123 million, or 30% of the settlement fund, unless the verdict is successfully appealed. At the same time, each affected customer will only receive a portion of the overdraft fees paid. That could be $35 or less per individual.
Are you included in a Bank of America class action lawsuit? Have you received a check in the mail from Bank of America and you don’t know why?
For my own finances, I’ve been a fan of credit cards with cash back programs. Some financial experts advise avoiding credit cards completely, even those cards that offer rewards like cash back or offer on best gas credit cards and small business credit cards. I’ve never been a fan of this approach — again, for my own finances — because I see a credit cards as just another tool for personal finance. A hammer is inherently neither good nor evil; it’s a tool that someone can use to fix a roof or to send another person to the hospital.
For a large portion of consumers, credit cards cause trouble. That may not be a reason to avoid credit cards entirely, as consumers can learn how to use credit cards effectively. Those of us who do believe we use cash back credit cards responsibly, paying bills in full every month, never paying interest, and buying only what we can afford, are relatively comfortable with the use of this tool, but even the best of us are subject to issuers’ traps.
Cash back credit card programs include traps that help issuers recover the cost of paying out benefits to their customers. While some traps can be avoided by managing finances closely, other traps take advantage of the psychological aspects of using plastic rather than cash. These traps can be more difficult to avoid, because consumers cannot control their subconscious tendencies. Here are the cash back traps to avoid, if you can.
1. Credit card users spend more
The process of taking cash out of your wallet and handing that money to another person is a very deliberate activity, both physically and mentally. Parting with cash has psychological ramifications. In most people, particularly those who best understand the value of having money saved, the act of giving the cash away triggers the same reaction as a painful activity. Spending money and pain are linked in the brain.
When you use credit cards, you add a buffer between your cash and the process of parting with it. Spenders are less likely to hesitate and less likely to get that twinge of pain associated with handing over bills and coins. People familiar with computer science would call this a layer of abstraction. You’re controlling your money by using a representation of that money, not the cash itself, and that makes the process feel better. In addition, cards with a rewards program like cash back encourage higher spending, because that cash back is seen as a reward that can be maximized by spending more.
Avoid this by making a concerted effort to buy only what you could afford with cash at any time.
2. Late fees and interest negate any cash back benefits
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Citibank has launched a new version of their Citi Forward Card with a credit card bonus worth mentioning. The new card offers cardholders the opportunity to earn 30,000 bonus ThankYou points, redeemable for $300 in gift cards. This is a big boost over the typical offer for this card, 10,000 points. Unlike many other bonus credit card offers, this one comes with a disadvantage of delayed gratification; earning the full bonus requires meeting three separate criteria. That doesn’t make the Citi Forward® Card – $300 in Gift Cards offer particularly attractive, but for young professionals with a fresh credit history, it may be the best card available today.
In order to earn the full 30,000 ThankYou point bonus on the Citi Forward® Card – $300 in Gift Cards offer, a new cardholder must do the following:
- Spend $500 in the first three months of card ownership to receive the first 10,000 ThankYou points.
- Spend $1,000 in months four through six of card ownership to receive the second set of 10,000 ThankYou points.
- Spend $1,500 in months seven through nine of card ownership to receive the last set of 10,000 ThankYou points.
As you can see the barriers to earning this full bonus aren’t particularly large, but it will take some time before the full 30,000 ThankYou points can be realized. You can meet these criteria while paying your balance in full every month; in fact, this is important to do, because any interest you pay will decrease the value of this offer.
This card also includes a rewards program that offers two ThankYou points for every dollar spent at restaurants and on books, movies and music, and Citi offers One ThankYou point per dollar on all other purchases. There is no limit to the amount of points you can earn every year, and the points never expire. Points are more valuable when converted into gift cards and travel than cash.
The Citi Forward Card – $300 in Gift Cards offer has a variable interest rate on purchases and balance transfers of 13.99% to 21.99% depending on credit history. Citi will reduce your APR by 2 percentage points when cardholders make payments on time and spend within their limits. It’s the only card marketed today that offers the perk of a reduced APR. There is no annual fee for using this card.
The $300 gift card bonus is available for a limited time only on select websites like Consumerism Commentary. Consider applying for the Citi Forward® Card – $300 in Gift Cards offer, especially if you’re just getting started in your professional career and don’t have the excellent credit (this card requires a good credit score, but not necessarily excellent) other top-of-the-line credit cards require. If you’re unsure about your credit score, consider visiting GoFreeCredit.com to check your credit score with a 7-day free trial.
