The Hidden Dangers of Credit Card Rewards

So, you’re tempted by that offer you received in the mail: 50,000 airline miles and all you have to do is spend a few thousand bucks.

While you may not need another credit card, a reward card may be a great option for you, especially if you’re responsible with your money. For starters, earning credit card rewards can be a great way to get a little extra cash or save on your next vacation.

On the other hand, credit cards can also cost you, especially if you overspend and tend to maintain a balance. To help you avoid the hidden dangers of rewards cards, take a look at three common pitfalls of these popular credit cards.

1. You can be tempted to overspend

Some of the best credit cards out there come with huge sign-up bonuses. But beware: you typically have to spend between $3,000 and $5,000 in a short time to get those perks. And, if you don’t usually spend thousands in the span of just a few months, you may end spending beyond your means simply to get those air miles and other bonuses.

What’s more, credit card holders obsessed with racking up rewards often want to use their cards as much as possible. Yet, for some expenses, like a mortgage or utility payment, the financial institution or utility company often assesses a fee for credit card payments. For example, you may be paying a three percent fee to get two percent back on your credit card. Although the rewards seem exciting, it’s important to understand that you’re spending more than you’re getting back.

2. You may rack up more debt

If you’re not careful, overspending to earn credit card rewards can land you in debt. Why? Because if you spend more than you can pay off monthly, you’ll end up paying interest on the amount you carry from month to month.

Case in point: the average credit card interest rate is 14.99%, according to Federal Reserve data for the fourth quarter of 2017. This is much higher than any rewards rate. For example, you may get two percent cash back for using a particular card. Whereas this gives you some extra cash, it’s a lot less than the almost 15% interest rate you may be paying on your credit card balance.

Another reason you can end up in debt: credit card issuers require low minimum monthly payments and if you only pay the minimum amount each month, you can stay in debt for a long time. For example, cards typically require that you pay only one to two percent of your balance plus interest. So, if you have a credit card with a balance of $10,000, your monthly payment is just $200. If your interest rate is 14.99%, it will take you roughly six-and-a-half years to pay off your debt, assuming you don’t continue to use the card. Plus, you’ll pay $5,784 in interest along the way.

3. You may take risks with your credit

The credit card rewards game can get addicting, and there are several hobbyists who sign up for multiple credit cards to earn more sign-up bonuses. If your credit is in stellar shape and you do this responsibly, the negative impact to your credit history can be minimal.

I’ve applied for and used almost 50 different credit cards over the past few years to get big travel sign-up bonuses. And while my credit report does show several new accounts over that time, it didn’t stop me from getting a low interest rate on a mortgage last year. Yet, it takes skill to know how to play the rewards game.

As a result, most people shouldn’t engage in this “credit card churning” hobby, especially if you tend to overspend or you’re not well organized.

Three ways to benefit from credit card rewards

If you do want to earn credit card rewards, it’s important to have a responsible plan. To get started, here are three ways to reap the rewards without paying a price.

1. Pay off your balance each month

If you’re going to use a credit card, make sure that you pay off your balance on time and in full every month to avoid interest charges and other fees.

This can get tricky if you have multiple credit card accounts. If you fall into this camp, set up email or text alerts to remind you when your payments are due. You can also set an alert for your statement date, which is typically a few weeks before you due date. This way you can pay early.

2. Get on a budget

If you haven’t already created a budget, now is a good time to do so. This basic financial planning tool can help you set goals in various spending categories.

Also, when it comes to taking advantage of new credit card promotions, a budget will help you determine whether you can qualify for big sign-up bonuses without spending more money than you have.

3. Use a debit card

If you’re not sure whether credit card rewards are worth the potential pitfalls, use a debit card instead. With a debit card, your transactions will be deducted from your checking account immediately, so you don’t have to worry about trying to figure out whether you have enough money to pay off a credit card balance.

Plus, some debit cards come with extra features. For example, the Chime Visa® Debit Card offers:

And, of course, there’s no interest rate on debit cards and for you, this may be the most important feature.

Don’t sacrifice financial security for credit card rewards

If you use credit cards regularly, the rewards should be considered an added benefit and nothing more. If you find yourself tempted by credit card rewards, take a step back and consider how to earn these perks in a responsible way. Remember: put your financial security first and you’ll be on your way to reaching your money goals.

 

What is an EMV Chip Card and How Secure are They?

When was the last time you actually swiped the stripe on your credit or debit card during a transaction? If it’s been a year or so, the timing sounds right.

Over the past 12 months, there’s been a huge technological shift from mag-stripe cards to those enabled with chips. In fact, chip-enabled cards represent more than 600 million cards in the U.S. alone. In spite of retailers in the U.S. being slow to embrace the new technology (in Europe and other parts of the world, retailers have by and large already adopted chip cards), you’ve likely seen merchants upgrading or replacing payment terminals to accept chip cards. While this takes place, magnetic stripes will continue to go the way of the dodo. Even if your old card hasn’t expired yet, your bank has probably already provided you with a chip-based replacement.

This migration to chips cards, also known in the industry as EMV (Europay, MasterCard, Visa) credit cards, is accompanied by a swirl of hype. For example, EMV providers commonly state that your transactions are more secure, resistant to hackers, and foolproof to fraud. About now you may be wondering: How does that little microchip inside your card provide you with these safety measures?

Read on to learn more about the EMV cards and how you can protect your money.

A primer on card technology

Magnetic stripe technology is actually quite archaic. It dates back about 50 years and utilizes the same analog format as an old cassette tape. It’s literally magnetized and matched to your bank account information. This data, embedded on a simple mag stripe, is consistent and therefore never changes.

So, anytime you go to swipe a stripe-equipped card, it reads the same data over and over again. And this consistent information is vulnerable to fraudulent activity because thieves can decode the magnetic field and duplicate your bank information. In fact, fraudsters commonly use credit card skimmers at ATMs and other locations to glean your personal information. Stopping fraud meant canceling your old card and getting a new one with new information. Unfortunately, your new card included the same stripe technology and it was therefore just as sensitive to theft as it was before.

By contrast, the computer chip on an EMV card is where your banking information is stored, and the chip is always changing up the data on your card. For example, you may have a card number that stays the same, but the information embedded on the chip is constantly being scrambled and encrypted. In short, your card’s chip contains a special microprocessor that creates a code for every transaction, no matter the amount.

So, when you insert your card into a physical payment terminal or when you’re shopping online, the computer chip communicates with the merchant and unscrambles the coded language. Your  payment information is then obtained using one of a few different types of authentication methods:

  • Static Data Authentication (SDA)
  • Dynamic Data Authentication (DDA)
  • Combined DDA with application cryptogram generation (CDA)

The EMV chip also ensures that both the transaction and the cardholder are verifiable (before the days of EMV cards, you’d accomplish this by entering your PIN number and card’s security code).

Essentially, your EMV card contains the exact same information as your old mag stripe card, but because the chip inside is always generating new coded information, it has an extra layer of protection that magnetic stripe technology fails to offer.

For example, if a thief gets his hands on your EMV card, he will have a tough time using it. Not only is it difficult to obtain the computer chip from your card (equipment to do this can cost upwards of $1 million), but the advanced encryption would make it nearly impossible to decipher your banking information. Even if your card number was stolen, and not your actual card, the would-be fraudster wouldn’t be able to use it because EMV chip technology prevents the number from being replicated and repeated. On top of this, a payment terminal won’t recognize the number and the transaction will be declined.

Follow these EMV chip safety tips

Although EMV technology makes banking more secure, identity thieves have become more sophisticated and will always try to find ways to access your money. Your Chime debit card, for instance, is chip-enabled, but you should still take precautions to protect your finances, pay safely and avoid getting scammed. Take a look at some ways to keep your money safe:

  • Guard your digits: At an ATM, the supermarket, the mall, or when using your laptop in a public space, never divulge your card or PIN numbers to anyone. Fraud can still occur, so if possible, opt to sign for a transaction instead of using your PIN. If a fake transaction occurs, the liability falls back on the issuing bank, or on the merchant if the business is not equipped to handle EMV transactions. Some cards have even done away with PIN numbers and employ a chip plus signature method. (Neither Chime or another bank will ever ask you to reveal your PIN number.)
  • Keep track of your bank statements: Banks are more vigilant today to stopping theft and may even intercept fraudulent activity before it happens. My bank, for example, recently notified me that there was an attempted unauthorized use of my debit card – before a transaction was made. But, thanks to my EMV card, the fraudster couldn’t use my card number, and the bank recognized that I wasn’t the one using the card. The moral here: Stay on top of your monthly bank statements and look for transactions, debits or withdrawals that don’t look familiar. If you spot anything suspicious, report it to your financial institution.
  • Opt for mobile payments: Chime’s spending and automatic savings accounts are just two ways to maximize your mobile banking experience without the need to use a physical debit card. To ensure your safety, you can also look for retailers and vendors with mobile payment technology as this lowers the risk of your information being captured. Adding your debit and credit cards to your phone and using mobile-enabled terminals can also help ensure a secure shopping experience.
 

Debit vs. Credit: Which One is Better for Saving Money?

If you’re struggling to save money, you’re not alone. According to a National Foundation for Credit Counseling study, 32% of Americans don’t have any short-term savings.

Before figuring out ways to save extra cash, you might want to first think about how you currently spend and pay for things. That’s right. Take a look at how debit and credit cards stack up against each other when it comes to saving money. This is an in-depth breakdown of debit vs. credit cards.

Spending power of the debit card vs credit card

As you can imagine, how much you save depends largely on how much you spend. The main difference between debit and credit cards is how much spending power you have.

With a debit card, for example, you can usually only spend what you have in the account. In some cases, though, you can spend more with overdraft protection. But, this isn’t recommended because banks charge an average overdraft fee of $33.07. To avoid this situation altogether, you can opt out of overdraft protection with your bank.

With credit cards, you can spend up to your credit limit, whether or not you have the money in your bank account to pay it off immediately. If you have a very low spending limit, you might not have issues paying off your balance in full. The higher the credit limit, though, the more tempted you’ll be to overspend.

Winner: Debit cards

Cashback with credit and debit cards

If you’re not saving enough on your own, one source of extra cash may be cash-back rewards you get from using your debit or credit card. The one problem with this is that not many banks offer debit card rewards programs. Most cash-back rewards programs are with credit cards.

Some credit cards offer up to 2.5% cash back. So, if you spend $2,000 every month on your credit card, that’s $50 you can withdraw and put in your savings account — or $600 per year.

Winner: Credit cards

Automatic savings linked to debit and credit cards

A debit card is tied directly to your checking account. This means that if you have a savings account with the same bank, you can easily set up automatic transfers from your checking to your savings accounts.

Some bank accounts even help you save money by using your debit card. For example, Chime will round up each transaction made with the Chime Visa® Debit Card to the nearest dollar and automatically transfer the roundup amount from your Chime Spending account to your Chime Savings account.

If you use your Chime Visa® Debit Card an average of twice a day, you could have almost $400 extra in savings after a year!

Winner: Debit cards

Debt

One of the biggest threats to your mission to save money might be your need to pay off debt. When you pay back debt, your monthly payment is going to your creditor instead of your savings account. What’s more, interest payments eat up even more of the money that you could be socking away into your savings – if only you didn’t have the debt to pay back.

Luckily, debt isn’t something you have to worry about with debit cards unless you’re consistently overdrafting on your checking account. With a credit card, however, you could get into debt if you’re not paying your balance in full each month. The longer this happens, the more debt builds up. And, since credit cards charge an average interest rate of 16.14%, that interest will add up fast.

Winner: Debit cards

It all depends on your financial habits

All things considered, debit cards do a better job of helping you save than credit cards. But that doesn’t mean they’re the best option for everyone. Your spending and saving habits are the most important factor in this debate.

For example, if you’re a big spender without a budget, you’d be better off with a debit card, which will restrict you to spending only what you have and keep you out of debt. Chime’s Automatic Savings Program is also a must-have if you struggle to save on your own.

However, if you already have good money habits, a credit card might be a good way to go. Remember that the rewards from a cash-back credit card can supplement the savings you already have.

Is a debit card right for you?

To find out which option, credit vs. debit, is best for you, take a step back and think about your financial habits. Be honest with yourself and consider how each payment method fits your savings goals. The good news: you’re not stuck with your decision. So, if you try it for a while and it’s not working out, you can always switch.

 

When to Choose a Debit vs. Credit Cards

With many young consumers opting for debit vs. credit, credit card enthusiasts are quick to point out what they’re missing in terms of perks like miles and even cash back. However, there’s no right answer when it comes to which type of plastic you should use. The important thing is that you understand the pros and cons of both.

Debit vs. Credit: How They Compare

The best choice for you likely depends on what you want to use your card for. Take a look at our winners for the following benefits, fees, and uses.

Fraud protection

Both debit and credit cards offer zero-liability protection on fraudulent purchases. But the process of getting your money back differs depending on the type of card you use. According to the Fair Credit Billing Act, the maximum amount you may lose on an unauthorized credit card charge is $50, and the investigation will likely be over by the time your statement balance is due. However, under the Electronic Funds Transfer Act, your potential loss on a debit card may be as much as $500 if you report the fraud more than two days after it took place. What’s more, the bank may not restore that cash to your account immediately. If you need that money now, you’ll be at the mercy of the bank. In both cases, you’re not responsible for any amount of the unauthorized transaction if you report the card missing before any fraudulent purchases take place. Winner: Credit cards

Spending control

The winner on this one is fairly obvious. Because debit cards are linked to a checking account instead of a line of credit, the only way to go into debt with this type of card is to overdraw your account. And you can avoid this by opting out of overdraft protection. It’s possible to use credit cards without going into debt, but people who pay off their balances in full each month may be in the minority. According to a 2016 NerdWallet study, households with credit card debt owe $16,748 on average. All things considered, it’s easier to overspend with credit cards than with debit cards. Winner: Debit cards

Rewards

Rewards are a common feature for credit cards. It can be difficult to find a debit card with a good rewards program. According to Elan Financial Services, just 17 out of the top 25 financial institutions offer a debit rewards program. Even then, credit cards offer big profits for banks, so they’re more competitive in offering rewards to entice people to use their cards more often. As such, you’ll likely find better rewards and big sign-up bonuses with credit cards. Winner: Credit cards

Fees

When applying for a credit card, it’s a smart idea to review the cards rates and fees as part of your application submission. When doing so, you’ll notice that most credit cards charge a slew of fees. Late fees, cash advance fees, balance transfer fees and foreign transaction fees are all common among credit cards. Some even charge an annual fee. And that’s all on top of interest charges if you carry a balance. Debit cards, on the other hand, typically don’t come with a lot of fees. In fact, if your checking account charges a monthly fee, you may be able to get the fee waived by using your debit card regularly. Better yet, with the Chime Spending Account and Chime Visa Debit card, you won’t have any fees at all. That’s right – no monthly maintenance fee, no overdraft fee, and no foreign transaction fee. You’ll also pay no ATM fees at over 24,000 MoneyPass ATMs. Winner: Debit cards

The Best Option May Depend on the Purchase

If you have a debit card and a credit card, you may benefit from using both. For example, when you rent a car, stay at a hotel or fuel up your car, it’s best to use a credit card. That’s because the merchant may place funds hold on your card. Depending on the purchase, that could be hundreds of dollars. If you’re using a credit card, funds hold is no skin off your back. But if you’re using a debit card, it means that your money is unavailable to use, which can cause problems if you need it. Also, some credit cards offer benefits on certain purchases. For example, you can often get rental car and other travel insurance coverage to help you save money when you’re on vacation. On the other hand, some merchants charge a fee if you use your credit card. For example, some utility companies may add a percentage of the transaction to your payment. Also, some gas stations may charge you a few more cents per gallon if you use a credit card.

Which Should You Choose?

If you only want one card to use for all your purchases, consider your priorities and the benefits and drawbacks of each card type before you choose one. Debit cards are a good choice if you struggle with overspending or just want to avoid that temptation completely. If you’re not as debt-averse, however, a credit card offers appealing features. Just be sure to pay off the balance in full to avoid interest and try not to use the card at merchants that tack on an added fee.

If you already have both a debit and credit card, the best choice may be to use one for certain purchases and the other for the rest. Review the terms and features of both your cards to determine which to use in different situations. The better you understand the terms and what you need, the more likely you are to find a solution that works for you.

 

This Is Why Millennials Are Choosing Debit Over Credit

In spite of all the perks and offers credit card issuers throw out left and right, millennials tend to use debit cards. In fact, in a 2015 survey, Chime found that 67% of millennials prefer debit cards over credit cards.

So, why are millennials wary of credit cards when older generations usually choose credit over debit? To get to the bottom of this conundrum, you first need to understand the environment in which millennials were raised.

They are children of the Great Recession

Millennials grew up in rocky economic times. When the Great Recession began in late 2007, it rocked consumers. According to the Bureau of Labor Statistics, unemployment rates reached 10% in 2009. The number of job openings decreased by 44% during the recession as a whole.

The uncertainty that came with the Great Recession put young consumers on notice. Things that appeared to be going smoothly before the crisis came crashing down – seemingly overnight for some. And it can happen again.

As a result, millennials tend to seek the security of debit cards, which are tied to accounts that are insured by the FDIC. In their mindset, if the economy tanks again, they won’t have any high-interest credit card debt to pay off.

Millennials are wary of more debt

Many are quick to point to big banks when laying blame for the Great Recession. But unwieldy spending on the part of consumers also contributed to the mess. At the end of 2007, consumer debt reached 127% of disposable income, compared with 77% in 1990.

Knowing that high debt loads can have that kind of impact has turned younger consumers off to borrowing. Rising student debt levels may also contribute to millennials’ aversion to credit. According to Student Loan Hero, 2016 college graduates were shackled with an average of $37,172 in student loans.

Indeed, millennials already feel like they’re drowning in debt. They certainly don’t want to add to this burden.

Federal regulations make credit cards less accessible

For many millennials, credit cards simply weren’t available to them as they were coming of age.

Before the Credit CARD Act of 2009, credit card issuers were handing out credit card applications like candy on campus. In fact, they’d often give out free candy, T-shirts, and other swag to encourage college students to apply.

With the CARD Act, however, credit card issuers were limited in how they could market to young consumers. For example, applicants under 21 must prove they have sufficient independent income or apply with a cosigner. Credit card issuers are also prohibited from offering tangible items to students on campus to encourage them to apply.

Accordingly, students no longer see credit card companies hanging around campus with free stuff. And, because federal regulations make it harder for students to get approved, credit cards aren’t as much a part of college culture as they once were.

Why Using a Debit Card Can Be a Smart Choice

There’s no one-size-fits-all answer to which type of plastic is better. But there are some compelling reasons to choose a debit card for your everyday purchases.

Spending is limited to what you have

Debit cards are tied to your checking account, so there’s no revolving credit line like with credit cards. In most cases, the bank deducts your purchase from your balance immediately, and when the money’s gone, it’s gone. As a result, debit cards are a great option if you have issues with overspending or want to avoid debt.

You can avoid fees

Some credit cards charge annual fees that you can’t waive. What’s more, some merchants, including gas stations and utility companies, may charge an extra fee if you pay with a credit card.

You can often avoid these fees by opting for a debit card instead. Even if you have a checking account that charges a monthly fee, some banks will waive that fee if you use your debit card regularly. There are also online bank accounts that come with debit cards that charge no bank fees at all. Chime, for example, offers no overdraft or monthly fees. Plus, every time you use your debit card, Chime will round up your spending amount and deposit the round-up into your savings account. How’s that for no fees plus extra cash?

You can avoid interest

Because debit cards aren’t tied to a credit line, there’s no interest involved like there is with credit cards. Of course, credit card users can avoid interest by paying their balance in full each month. But for some people, the temptation to pay over time instead can cost them.

You Do You

There are several arguments about which is better: debit or credit. Ultimately, the right choice is the one you make for yourself. For people who can budget and deal with debt responsibly, credit cards may be a good choice. However, you may not fall into this camp.

If you’re like most young consumers who prefer to avoid financial risks altogether, debit cards are the perfect answer.