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Fine Print Alert: August 22, 2014

Editorial Note: The editorial content on this page is not provided or commissioned by any financial institution. Any opinions, analyses, reviews, statements or recommendations expressed in this article are those of the author’s alone, and may not have been reviewed, approved or otherwise endorsed by any of these entities prior to publication.

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In our weekly Fine Print Alert newsletter we call out good news from the financial community and shine a spotlight on any sneaky changes or less than favorable strategies employed by financial institutions.  We also wrap up MagnifyMoney news and share our favorite reads from the week.

Fine Print Alert

Fines, Fines, Fines

Bank of America will be paying nearly $17 billion – yes, billion with a ‘B’ – to settle the investigations into their crisis-era mortgage business. This is a landmark settlement, higher than any other if its kind. So, how does this settlement impact consumers? Several states will be receiving a portion of the fine money and some have directed the money to refunding public pensions that suffered losses on mortgage securities. Other states have decided to put the funds towards consumer relief or the state’s general budget.

First Investors, an auto loan company, will pay $2,75 million in CFPB fines as a result of knowingly reporting inaccurate information to the three credit bureaus: TransUnion, Equifax and Experian. First Investors were charged with reporting misinformation about wrong payments and overdue amounts, distorted dates and inflated delinquencies.

Thank You No More

At MagnifyMoney, we don’t believe you should be looking to make money from checking accounts. Your goal is to keep as little money in a checking account as possible, and to make your checking account and ATM usage completely free. To entice you to keep too much money in a checking account, banks often offer rewards. At Citibank, this was the Thank You program. If you had direct deposit and used bill pay, you could earn Thank You points. They are changing that. From December 16, only Private Bank, Citigold and Citibank Account Packages can earn Thank You points. We won’t talk about Private Bank and Citigold (those are big balance accounts). To have an Account Packages checking account, you need to keep at least $15,000 in the account. If you have a direct deposit and bill pay along with your account, you will earn 650 Thank You points. That is $65 of value. If you put that money into an online savings account, you would earn over $140 of interest. Basic, Access and Student accounts will no longer earn Thank You points. Even more reason to avoid traditional bank checking accounts!

Special Shout-out: FeeX

I [Nick] pride myself on low-cost investing. For example, I rolled over my 401k into an IRA. The IRA is exclusively populated with Vanguard index funds and Fidelity Spartan Index Funds. I was feeling good about myself, and then I read about Feex.com. I decided to let their program crawl my IRA, and I was shocked about what I found. For every one of my holdings, they were able to find an alternative mutual fund or ETF with a dramatically lower cost. For example, I am invested in a Vanguard Mid Cap Index Fund. The expense ratio is 0.24%. But, Schwab offers a US Mid-Cap ETF with a  fee of 0.07%. In the last 90 days, FeeX  found $28 worth of fees that I had paid. If I switched to their recommendations, the cost would have found $11 worth of savings. That may not sound like a lot, but you need to think about compounding interest. Over the next 30 years, I could save $10,619 in fees by taking their recommendations. This was a really cool service, and I highly recommend doing a check-up. Compounding interest is great when it is on your side, and terrifying when it isn’t. At MagnifyMoney, we want to get people to slash the cost of their credit card debt. But, we are equally passionate about getting people to pay less for their investment products. And hats off to FeeX, for creating a great tool that helps with investments. And, if you are like the majority of Americans without assets sitting at Vanguard, you will find that the absolute savings will be even more shocking. Give it a try!

MagnifyMoney around the web

Our favorite personal finance stories this week

Should I Contribute To A 401k, Roth IRA, Or Health Savings Account? – “While, ideally, we’d max out all those accounts every year, realistically, many people have to choose where to put their money. All of that depends on your age, tax bracket, and how much you have to invest.” Analyze where to put your money with Kim on Eyes on the Dollar.

Why Saving for Our Kids’ Education Is Not Our Top Priority – “What tugs on parents’ heartstrings is the nagging feeling that prioritizing retirement saving ahead of saving for a child’s college education equates to loving your children less than yourself. I understand that feeling, on one level, but it shows a misplaced priority, in my opinion. There are loans and scholarships for college. Nobody is going to give you a scholarship for retirement.” Read John of Frugal Rules full argument over on DailyFinance.

Steps To Get out of MASSIVE Credit Card Debt Due to Lifestyle Inflation – “It’s embarrassing to admit, but I tell this tale as a warning to all people like me who are on the bandwagon of lifestyle inflation, “I deserve” and family struggles that may cause you to take your eyes off the ball and wake up one day to say “How did I get here?” … The grand total was $393,500. I was 52 years old and my husband was 59. It was a personal debt disaster story. “ Find out how Debs is working her way out of debt in her guest post on Financial Samurai.

How I Graduated College With $100k…. in Savings – “At age 21 I graduated college with $100,000 sitting in the bank. Scratch that – most of it was invested elsewhere… but you get the point. I’m not writing this post because I think I’m cool (beatboxing skills, aside ;)). I didn’t earn $100k before even getting a “real job” because I’m special – I was just intentional.” By Will of First Quarter Finance on Budgets Are $exy.

Stylist gives free haircuts to the homeless – A heart warming story which proves you don’t need a lot of cash in order to help others. By Blake Ellis on CNN Money

Have questions or a fine print alert tip for us? Get in touch via TwitterFacebook, email [email protected] or in the comment section below!

Advertiser Disclosure: The products that appear on this site may be from companies from which MagnifyMoney receives compensation. This compensation may impact how and where products appear on this site (including, for example, the order in which they appear). MagnifyMoney does not include all financial institutions or all products offered available in the marketplace.

Erin Lowry
Erin Lowry |

Erin Lowry is a writer at MagnifyMoney. You can email Erin at [email protected]

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Citibank Offer

Editorial Note: The editorial content on this page is not provided or commissioned by any financial institution. Any opinions, analyses, reviews, statements or recommendations expressed in this article are those of the author’s alone, and may not have been reviewed, approved or otherwise endorsed by any of these entities prior to publication.

Advertiser Disclosure: The products that appear on this site may be from companies from which MagnifyMoney receives compensation. This compensation may impact how and where products appear on this site (including, for example, the order in which they appear). MagnifyMoney does not include all financial institutions or all products offered available in the marketplace.

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Christina Gonzalez |

Christina Gonzalez is a writer at MagnifyMoney. You can email Christina at [email protected]

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Warnings From An Insider: 7 Store Credit Card Traps To Avoid

Editorial Note: The editorial content on this page is not provided or commissioned by any financial institution. Any opinions, analyses, reviews, statements or recommendations expressed in this article are those of the author’s alone, and may not have been reviewed, approved or otherwise endorsed by any of these entities prior to publication.

7 Store Credit Card Traps To Avoid

This holiday season, you will likely be offered a store credit card. You need to be careful before signing on the dotted line. Although the in-store discounts might look appealing, there are some real dangers and traps you need to avoid. (And I know, because I used to run a rather large credit card company).

Why are these products so dangerous? First, the retailer just wants you to spend as much as possible. So, all of the incentives will be to get you to spend more money than you had originally planned.

Second, the credit card companies pay a lot of money to the retailers in order to get the credit card deal. Typically, credit card companies have to pay a “bounty” for every credit card booked to the retailer. In addition, most credit card companies have to share a percentage of interchange revenue with the retailer. (Interchange is the fee paid by merchants to credit card companies when a card is used for a purchase). Because credit card companies have to give all of this money to the retailer, they need to make it up somehow. And the usual way to make back that money is by charging much higher interest rates.

You can get a good deal. I once moved into a new house. I was very tactical: I went shopping on a day with deep in-store discounts (Columbus day, ironically), and I applied for a credit card that had a 10% discount for purchases made on the day. Because I knew I would be spending more than $2,000, the savings (more than $200 for the credit card purchase alone) was a great deal. And, most importantly, I paid the balance in full at the end of the month. I had planned my purchase in advance and used the store card offer to save more money. That is the only way to get a good deal.

Here are the 7 traps to beware:

1. The interest rates are high, regardless of your credit score.

The vast majority of store credit cards do not offer lower interest rates for people with excellent credit scores. In other words, there is no risk-based pricing. In addition, the average interest rate on store cards is much higher than traditional credit cards, and often starts with a “2”. Even people with an 800 FICO would receive a 20% (or higher) interest rate on most store cards.

2. 0% financing is not really 0%.

Most store cards will offer some form of 0% financing. However, most store cards do not waive the interest. Instead, the interest is deferred. If you pay off the balance in full during the promotional period, you don’t pay any interest. However, if you don’t pay the balance in full you will end up getting charged interest retroactively at the high store card interest rate. Using deferred interest is a common practice. Even Apple, in partnership with Barclays, uses this offer.

3. Your Credit Score Will Be Hit With A Hard Inquiry.

When you apply for a store card, a hard inquiry will hit your credit report and your score. Although inquiries do not have a major impact (it could be as few as five points), the impact could be consequential if you plan on applying for a mortgage or auto loan in the near future. With a mortgage, five points could be enough to put you in a different pricing bracket, costing you thousands of dollars over the life of the loan.

4. Rewards for “out of store spend” are usually much better on other cards.

Store cards often have great rewards for in-store spend. For example, the Amazon Visa offers 3% cash back for purchases at Amazon.com. The Target Red Card offers 5% off in-store purchases at Target. However, the deals are much worse for spending out of store. For spending outside of the store, many credit cards offer no rewards or only 1%.

5. You will spend more money than you planned. Yes, you will.

The oldest “trick in the book” is an offer that gives you 10% off in-store spending on the day that you apply for the card. The purpose of the offer is to encourage you to spend more money than you planned. And years of data shows that people will in fact spend more money.

6. Because interest rates are high (and retailers demand it), store cards are willing to accept people with very low credit scores who have a lot of debt.

Retailers sign agreements with banks to issue store cards. These agreements come up for renewal every five or seven years. Retailers force banks to bid on the business, and it is “all or nothing.” If a bank loses a deal, it can be a huge hit. So, the power really sits with the retailer, who owns the customers. Retailers will demand higher bounties (payments when cards are booked), better rewards for consumers and better interchange deals. Retailers want to pay very little interchange for in-store purchases, and they want to collect as much interchange as possible for out of store spend. However, one of the biggest requests is “approval rate.” Retailers want banks to approve as many people as possible, for obvious reasons. As a result, banks will charge very high interest rates and will often approve people through store cards whom they would otherwise reject. There is a real danger that people with bad credit who are already in too much debt will get a line. Some store card programs approve people with FICO scores in the low 500s.

7. You will be pressured by a sales person.

Retailers are most focused on increasing sales. And giving someone a store card with a same day discount will increase sales. So, they will put a lot of pressure on employees to push credit card sales at checkout. The financial incentives for retailers can be sizeable. As a result, you should expect to get this sales pitch constantly and regularly. Stay strong!

Store cards are not all bad. Here are the three reasons why a store card could be a good deal:

  • You are making a big purchase and want to take advantage of the discount offered. You can afford to pay the statement balance in full and on time. And you are not applying for a mortgage or auto loan in the next six to twelve months.
  • You do a lot of shopping with one particular merchant. For example, you live at Target for most of your needs. Getting the big in-store discount would be more rewarding than a traditional 2% cash back credit card. But, this only makes sense (like all cash back cards) if you can afford to pay the statement balance in full and on time every month.
  • You are looking to rebuild credit, and have a lot of discipline. Because store cards approve people with lower credit scores, this can actually be a good tool. A store card with no annual fee is actually a much better deal than most other credit cards targeting people with scores below 650. Just make sure you never spend more than 10% of the available credit limit and you pay your balance in full and on time every month. By doing that, you can increase your score over time without paying an annual fee or interest. But, if you don’t have the discipline, don’t do it.

Advertiser Disclosure: The products that appear on this site may be from companies from which MagnifyMoney receives compensation. This compensation may impact how and where products appear on this site (including, for example, the order in which they appear). MagnifyMoney does not include all financial institutions or all products offered available in the marketplace.

Nick Clements
Nick Clements |

Nick Clements is a writer at MagnifyMoney. You can email Nick at [email protected]

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