Do You Select Credit Or Debit?

Yahoo Finance recently discussed the dangers of using a debit card, pointing out that the best alternative may be to select credit if given the option.

Here are some of the reasons that they listed:

  1. Loss limits – Credit cards and debit cards both limit you to $50 of personal obligation in fradulent situations, but you have a much shorter window (2 days) to report this with debit or you’ll start to be on the hook for more.
  2. Pay now / reimburse later – Because debit takes the money from your account immediately, it won’t be there during the time that your fraud claim is being investigated, which could lead to big issues for people who don’t have a cushion or get their accounts cleaned out.
  3. Merchant disputes – Same goes here, you already paid for the item that you are now having a problem with.  With credit, you aren’t on the hook for the money during the dispute process, whereas the merchant has your money during the dispute timeframe if you select debit.
  4. Phantom charges – Some places (like hotels) will put a hold on additional money at the time of purchase.  While they eventually ‘disappear’ once the transaction settles, this could lead to problems if you have a low balance and inadvertently cost you overdraft fees or bounced check fees.
  5. Overdrafts – There’s been a direct correlation to the number of overdraft transactions and the use of debit card transactions.  One, apparently, begets the other.
  6. Skimming-  If someone gets a hold of your account number, your bank account can be cleaned out before you or the bank notices the activity.  The chances of this are a lot lower in credit card transactions.

We always use the ‘credit’ option when we use our debit card.  I’ve noticed that more and more merchants seem to be trying to subtly lead customers to using the debit option by removing the Credit/Debit choice on the pinpad devices, and instead defaulting to the ‘Enter Your PIN’ screen which would make it a debit card purchase.

The dirty little secret here is that merchants pay less to the banks when you use the debit option versus when you select credit, so it makes sense that they want you to use debit.  However, the way I look at it, they’ve already factored the costs of the credit transactions into the cost of their goods or services, and it’s not like they’re going to pass along some of the ‘savings’ along to you that they’d see if you select debit.  It goes right in their pocket.

The bottom line is that consumers take the biggest risk when they select debit, and it’s not a risk I’m often willing to take.  About the only times I ever select debit are when I’m at Costco (they don’t accept ‘credit’) or in the rare event that I want cash back and can save a trip to the ATM, and usually I’ll kill two birds with one stone and just get the cash at Costco.

This article raised some good points, but we were already in the ‘use credit’ boat.  Do you agree or is there any reason where you prefer to use debit?

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Citi Dividends Changing Terms

I’ve been a faithful Citi Dividends cardholder for a few years now.  I signed up a few years ago, enticed by the cashback rewards.    Before Citi, I had used a couple of different rewards cards, but eventually settled with Citi as the cashback rewards made this a great card, especially considering that there was no annual fee and that we don’t pay any interest charges, paying off our balance every month.

Citi recently sent a notification that the terms of the card are changing.  For the past few years, they paid 2% cash back on the ‘bonus’ categories including gas, groceries, and cell phone bills and 1% on everything else.  Beginning July 1st, they will still pay 1% on everything, but the ‘bonus’ percentages will turn into a ‘rotating’ category program where different categories will offer ‘bonus’ money for three month periods.  The first period (July 1st – September 30th) pays 5% on some categories, most notably restaurants.

My dad asked me how this will affect our usage.  At this point, both my wife and I have between $25-35 in rewards on our cards.  Since Citi will only pay you after you reach $50 in rewards, we are going to continue to where we at least get a reward.  After that, I think we will probably keep the card and use it selectively on the ‘bonus’ categories that we spend money on anyways.  I would think we might look for another cash back card that offers higher rewards especially on gas and groceries, as it’s been nice to get those extra rewards for so long.

Does anybody know of any good cash back rewards cards that pay above 1% rewards across the board or on various categories?

Will anybody be cutting up their Citi Dividends card as a result of this announcement?

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How Citibank Paid For Our New TV

Read the title of this post and you might think that Citi got generous and sent us a new TV.

Unfortunately, the generosity of Citi isn’t quite to that level.  However, it was the next best thing in my book.

Both my wife and I have been using our Citi Dividends cards for over three years now.  Citi Dividends is a cashback rewards card that currently has no annual fee.  Since we pay our credit cards off every month, I pay little attention to what the interest rate is.

The Citi Dividends card pays at least 1% cash back for all purchases.  They pay an extra percent (total of 2%) for certain categories of purchases including those at grocery stores, gas stations, convenience stores, drugstores, and utilities.  I believe that there are others as well.  You accumulate reward cashback every month, and when your balance hits $50 you are eligible to request a check.

My wife and I have both been putting purchases for all of the 2% categories on our card, as well as most ‘bigger ticket’ items, figuring that 1% is better than nothing.  When we get a check, we have been banking it in our long term savings accounts (currently split between ING Direct and GMAC Demand Notes).

Last year, around the holidays, I found a Slickdeal on a TV for our kitchen.  We previously had a small tube TV, but it was bulky and took up a lot of room on our countertop, which is often in high demand.  The deal was a nice 19″ LCD HD TV for $129.99 including shipping, plus we received a couple bucks back through Bing’s cashback program.  When it came time to pay for it (and it went on our Citi card, of course), I simply removed the money from our earmark and paid it off.

My wife and I have decided that we want to use that money for more ‘luxury’ purchases rather than to pay bills or pay down student loan debt.  I think we have both agreed that we’d be using this for electronic type purchases, so additional TVs, computers, etc. would be funded completely or in part with this ‘free’ money that we earn just by using our credit card.

We make sure that we don’t buy things unnecessarily, so it’s not like it’s costing us money to use the card via unnecessary purchases.  As I mentioned, we also pay it off every month, so there’s no offseting interest charges for us to worry about.

I know that there are other cash back cards out there.  In fact, I think that Citi no longer even offers this particular card for new customers, but I know that they have other cash back cards out there, so I’d recommend shopping around in the event that you don’t have a cash back rewards card but are interested.

Citi has had the same level of rewards for a few years now, and I’ve never ‘chased’ other rewards cards for fear that as soon as we got new cards paying a little more, they’d end up cutting the rewards anyways.  So, until one comes out that has a deal too good to pass up or until Citi cuts their rewards or raises their rates, they have at least two loyal customers.

Customers that like ‘free’ TVs, too!

Note: This is an unsolicited post; I was not paid or asked by Citi to write this post.

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Are Rewards Credit Cards Worth It?

Earlier, I was reading the post ‘Thoughts on Going Cash Only- The Benefits and Drawbacks of Not Using Credit Cards‘ on Think Your Way To wealth. It’s a well written post that outlines some of the benefits and drawbacks of using cash versus credit.
One of the comments struck me as very interesting. In part, Get Out Of Debt wrote, “As for the earning rewards stuff – do people really earn that much from their credit card rewards? I’m pretty sure it’s trivial amounts, and you have to spend tons to make it worth it i.e. spend money you haven’t got.”
This got me thinking because my experience has been quite the contrary. Let me go through the points here:
Background
Both my wife and I have Citi Dividend Rewards credit cards. The card pays 1% cash back for regular purchases, and 2% for purchases made at grocery stores, drugstores, gas stations, utilities, and convenience stores. Back when we first signed up, they actually paid 5% for some of the special categories.
Point 1: Do people really earn that much from their credit card rewards?
We have been collecting our rewards into a savings account with the intention of eventually replacing some of the electronics in our home. It’s total luxury but our rationale is that the money we’ve earned through this credit card has been ‘extra’ so we agreed that we can save it for some fun stuff. Our goal is to replace our 32″ tube television with a flat screen TV once the TV dies. How long this could be is anyone’s guess. The TV is about 12 years old, so it could go tomorrow or it could be another few years.
In any case, here’s how much we’ve got set aside that has been paid exclusively from our Citi Rewards cards: Over $800.
My guess is that by the time we’re ready to replace the TV, we’ll be able to buy a new one without going outside the money in this account. At least that’s my plan.
My thought: Yes, it is possible to earn that much from a rewards card.
Point 2: You have to spend tons to make it worth it
We’ve been collecting the amount we have for three years or so, maybe a bit longer. Still, in that time we’ve used our credit cards mainly for the category spending that gives us the most rewards.
Let’s look at an example.
Say you use your credit card as follows every month:

  • Groceries – $350
  • Gas – $200
  • Utility Payments – $100
  • Drugstore Purchases and Prescriptions – $50
  • Gifts – $100
  • Travel – $100

The first five categories are the ‘bonus’ categories. These total $700, so at 2% back per month you would earn $14. The bottom two categories total $200 and at 1%, you would earn an additional $2, for a total of $16 per month.
Over twelve months that totals to $192.
This is pretty typical of an average month for us. Often the gifts and travel are something else, maybe clothes, maybe a day trip, but a couple hundred dollars of ‘other’ spending per month on our credit cards is fairly normal for us.
Now, we’ve done better than that, averaging about $267 per year. I’d account the differences to:

  • Additional money earned the first year before Citi cut the rewards from 5% to 2% on the special categories
  • Charges made of large purchases during our wedding and honeymoon planning strictly for the purpose of gaining cash back rewards. One example: our honeymoon. We splurged and went to Hawaii. This was not cheap. Still, we put it on our credit card and paid the credit card with the money we had saved for our honeymoon. Even though we were ‘only’ getting 1%, that was probably $50 that we wouldn’t have had otherwise. It adds up.

My thought: You don’t have to spend a lot to make it worth it. If you find a card that rewards you for the spending that you do anyways, you’re getting something for nothing, and even with the basic $192 per year, that can add up pretty quickly. However, keep in mind that this assumes you are not carrying a credit card balance.
Point 3: You spend money you haven’t got
My wife nor I have ever carried a balance, and we haven’t spent on our credit card just for the sake of spending. Both of us pay our balances in full every month, so we don’t send a penny of our ‘reward’ back to the card company in interest.
As I said above, we’ve charged things that go to our monthly expenses, or larger ticket items that we have the cash saved for already.
My thought: It boils down to responsible spending. If you can be responsible with a credit card, then it is possible to do really well with a rewards card. But, if you have had trouble with credit in the past, then it might not be worth the risk of getting in over your head.
So, I guess I’ll sum up by saying that my experience has proven opposite of what the comment shows. But, we’ve also been very lucky as to not have had credit problems. Each situation is unique and I think everybody should ask whether they can handle the availability of credit. If history has shown that you can, then by all means I suggest considering the right rewards card.

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