Free Credit Cards: Fact or Fiction?

 

Guest post time! This one was written by Jason Bushey. Jason is a full-time personal finance blogger, and he runs the credit card comparison website Creditnet.com. Not only that, but we agree with just about everything he says. You read now: 

CreditNet

 

Google the term “free credit cards” and you’ll see close to 500 million results displayed. Some results are legitimate, others not so much.

So is there really such a thing as a free credit card? Technically yes, but it’s really up to the cardholder to determine how long that card stays “free”. If it’s free credit cards you’re after, the key to your search is to identify and ultimately dodge the following fees…

Annual Fees

The easiest fee for consumers to identify is the annual fee. Any card that requires an annual fee is decidedly not free. That said, not all annual fees are a ripoff. In fact, some of the top credit card offers on the market require a marginal annual fee (usually under $100), and often that fee is waived the first year of cardmembership.

Noting the demand for no annual fee credit cards in today’s market, some credit card issuers – including American Express, Barclaycard and Chase – have released two versions of the same cards, one that requires an annual fee and one that does not. In each instance, the card that requires the annual fee is superior in just about every category beside, well, the annual fee.

That said, there are some superb credit card offers on the market today that require no annual fee. If you’re in the market for a card that’s essentially free to carry, make sure to avoid annual fees.

Foreign Transaction Fees

More under-the-radar are foreign transaction fees. For consumers that never leave the homeland, these fees are of no concern. But if you do plan on taking your credit card abroad, than you should absolutely consider a card that requires no foreign transaction fees.

Often, foreign transaction fees range from one to three percent per dollar spent, which can add up tremendously over the course of a trip. Before going abroad, identify whether or not your card requires foreign transaction fees and – if so – consider leaving it behind and applying for a new card that does not charge these fees.

Late Fees

Then there are late fees. If you pay late, you’re more than likely going to get hit with a fee, and that doesn’t even take into account the knock your credit score could take if you default on the payment completely. (Don’t pay late. Ever.)

There’s actually one card that never charges late fees – Citi Simplicity®. This card is actually notorious for its lack of fees, since there’s also no annual fee and no APR hikes if you’re late on a payment. Another card that’s light on fees is the Discover it® card, since it waives the first late payment fee (though it’s up to $35 thereafter). This card also requires no annual fee and no foreign transaction fees.

That said, these cards are very much the exception rather than the rule. If you don’t want to pay credit card fees, don’t pay late. It’s that simple, really.

Paying Interest

Finally, there are interest fees. The higher your balance and the higher your interest rate, the more you’re going to pay in interest. Here’s where determining whether or not a credit card is and remains “free” really comes down to your practices as a consumer.

If you carry a balance after your 0% introductory period has expired, you’re unfortunately going to pay interest. And since APR’s generally hover anywhere from 10 to 29.99 percent (according to LowCards.com, the averaged advertised APR for credit cards is currently 14.25 percent), you could be paying an exorbitant amount in interest each month if you carry a balance. Interest rates make paying down debt arduous and at times seemingly impossible, especially when the minimum payment barely covers any of the interest required.

The only way to maintain an essentially free credit card is to pay your balance on time and in full each month. If you don’t, you could end up falling into the pratfalls of credit card use, which includes accumulating debt, missing payments and ultimately going medieval on your credit score.

In conclusion…

Fact: Free credit cards do exist in theory, but it’s up to you to keep them that way.

WRITE IT DOWN

Go ahead, try and recreate the mirror images of the backs of the embossed numbers. See where it gets you.

Go ahead, try and recreate the mirror images of the backs of the embossed numbers. See where it gets you.

 

A rare financial misstep. It didn’t cost any money, but it was inconvenient. Worse yet, now the folks at Capital One are convinced we’re crooks.

Your humble blogger had a single credit card, an American Express with a generous rewards partner. But as you probably know, not everyone takes American Express, which necessitates getting either a Visa or MasterCard. The CYC checking account card is branded with one or the other, of course, but the idea is to keep as little money in that account as possible. That way, we can put our cash to more lucrative uses.

If we ever need to buy something expensive from a retailer that doesn’t take American Express, we can either

  • constantly remember the updated balance in the CYC checking account, or
  • get yet another card, either Visa or MasterCard, and use it only for big purchases in places where the American Express card is no good.

So way back in the early 21st century, we graced those relentless people at Capital One with our noblesse oblige and granted them the privilege of giving us a card. God knows they weren’t ever going to get any interest payments from us, so we were acting in our capacity as free riders. Let the other Capital One cardholders carry balances, and meanwhile we’ll capitalize on the opportunity to buy stuff now and not have to pay for it for a month.

Maybe it’s our inherent frugality, or maybe it’s the places where we choose to shop, but we went months and months without ever using the Capital One card. It sat there in the wallet, neglected, watching with melancholy as the driver’s license and the National Parks pass and the concealed weapons permits got pulled out daily and went on exciting adventures.

Finally, last month, we had cause to use the Capital One card. And didn’t happen to have any identification at the time, which meant the sales clerk asked for the card’s PIN.

Uh…

1234? No, that’s crazy talk.
0000? That doesn’t work either, huh?

We discreetly paid cash, walked into the parking lot away from prying and suspicious ears, and called Capital One customer service about the little problem with our depleted long-term memory. We offered up the account password, the answers to the security questions (“Madrid”, “sea kayaking”, “July 13”), and our phone number.

Which wasn’t the phone number they had on file. That’s impossible, but they insisted the number was wrong.

After a 10-minute hold, and they probably keep you waiting that long so they can weed out the impatient common thieves who make their livelihood by stealing wallets, a manager got on the line. She asked the same questions we’d already answered, but there was still that pressing matter of not being able to remember that damned phone number, whatever it might have been.

The manager played hardball, asking a new set of questions that no card thief would know the answers to. The trouble was, only the most devoted cardholder would know the answers. For instance:

“What were your last 5 purchases?”

Dammit. The career total of purchases on this card was almost certainly less than 5, and maybe that was the answer she was looking for. Again, no clue, and again, the most recent purchase on the card was sometime during the Bush Administration. If at all.

Even though the other party was in a call center on the other side of the country somewhere, there are few things as embarrassing as being asked to give easy proof of your identity to someone who needs it and being unable to do so. If you think “I don’t know” sounds dumb when your middle school teacher asks you who the protagonist of Animal Farm is, try saying it in response to a question that indirectly requires you to assert whether you are who you say you are.

The manager went to the next test on the list, reserved only for the most obstinate and determined fraudsters. She pulled the credit report and asked, “Who’s your mortgage lender?”

CYC owns a lot of real estate. With a lot of mortgages. Even now, sitting behind a keyboard, it’d take a good 5 minutes to determine which lending institution goes with which property’s note. This is exponentially harder to do from memory.

Chase?
No.

Greenpoint?
No.

Washington Mutual?
No, that’s Chase now.

At that point, your humble blogger might as well have faked the accent of a Taiwanese Triad member who’s pretending to be an absent-minded cardholder who happens to have a Gaelic last name. It wouldn’t have worked, but it would have been less humiliating. The manager hesitated, the disdain in her voice unmistakable. We can only wonder if she wasn’t triangulating the position that the incoming call was originating from, and getting ready to sic Treasury Department agents on the offender.

Area Man Brought Down In Hail Of AR-15 Fire After Attempting To Buy Furniture With Stolen Credit Card

“Look, I don’t have that information handy. Let me get home, in front of a computer, and I’ll call you with it.”

Even now that sentence looks ridiculous, though every word of it was sincere.

Hours later, the incident had passed into the same memory landfill that got us into this predicament in the first place. Just plumb forgot about it, and got on with other things. Until several weeks later, when wouldn’t you know it, another perfect storm formed: big-ticket item, limited cash, retailer who doesn’t take American Express.

CARD DECLINED.

There was no outstanding balance of course, nor anything like that.

Went home, fired up the Capital One account page, took a deep breath, poured a stiff drink (fruit punch Gatorade) and called the 800 number. Our uncomfortable phone conversation of weeks earlier had doubtless been flagged in Capital One’s customer service database, with all sorts of red-font exclamation points and asterisks.

An agent answered, and pushed us up on the same treadmill as before. If you offered $1 million right now, we couldn’t tell you what freaking phone number they’d mistakenly attached to the account (which is clearly their fault, not ours, right?)

The agent explained that at this point, the only way to convince Capital One that we weren’t pulling a fast one would be to fax them a copy of

  1. Driver’s license, which will always show up clearly and legibly in a fax
  2. Social Security card, which disappeared 13 years ago
  3. A utility bill, which wouldn’t do any good anyway because all the utility bills are under the name of a Control Your Cash limited liability company instead of an individual’s name.

Oh, and items 1) and 3) are 3000 miles away right now, at the summer home. (Yes, there are separate summer and winter homes. You could be in the same situation too, if you bought our book.) This whole process could take 7 to 10 business days.

At this point, there was only one prudent thing to do. (See picture above.) Now we have to apply for another card from another issuer, and explain why we had to close our last account and/or let it lay dormant. All because we couldn’t remember some stupid string of digits.

Folks, do yourself a favor. Write EVERYTHING down. Even the stuff you think you’re never going to use. Create a document or a note on your phone. Or better yet, a contact in your list, and name it “Passwords and security questions” or something. Then, answer with glee and conviction when a suspicious Capital One customer service rep implicitly asks you to prove you didn’t steal your card. You’ll save yourself plenty of aggravation.

Is There Ever An Excuse For Paying A Fee To Hold A Credit Card?

 

Also, it's so pretty!

Also, it’s so pretty!

 

Yes. But for our purposes, no.

In The Greatest Personal Finance Book Ever Written, we tout American Express Blue Cash Everyday® as the best consumer credit card available. It’s been a while. Is our recommendation still valid?

Blue Cash Everyday® was called simply “Blue Cash” at the time, without the “Everyday” qualifier, which we’ll get to in a second. Why did we think this was the best card out there? Let’s explain in handy point form:

  • No annual fee, duh
  • At least 1% cash back on everything (up to 3% on some things)
  • The best protection in the business. No one resolves a customer claim as quickly and efficiently as AmEx does.

That’s it. 3 criteria. We couldn’t be less interested in interest rates, late payment penalties, balance transfer rates or related nonsense. All of that is meaningless, if you pay your bills on time and don’t overextend yourself.

Looking at it now, we realize that the reason most every other personal finance “expert” advocates looking at interest rates first is because doing so means adopting a loser’s mentality. The implicit question is “How can I minimize the damage I will doubtless do to my finances?”, when it should be “How can I capitalize on the plethora of choices I have as a consumer in a diverse marketplace, and come out of this ahead?” Worrying about interest rates means you’re playing too much defense and not enough offense, and thanks to Dave at the dormant 6400 Personal Finance for creating so pithy an analogy.

Today, Blue Cash Everyday® offers 2% discounts at “stand-alone” gas stations and certain retailers*, 3% at stand-alone supermarkets. The latter is valid only for the first $6000 you spend in a given calendar year: beyond the 6001st dollar, you get the standard 1% that Blue Cash Everyday® offers on everything else.

In the past, one disadvantage to Blue Cash was that it reimbursed you with those discounts in inconvenient increments. You had to spend thousands to receive any credit. Today, American Express will reimburse you in increments as little as $25. (Figure out how long would it take you to buy $833 worth of groceries, and act accordingly.)

We used to be Discover devotees. Discover initially offered 1% back on everything, typically in $40 increments. Hey, a decade ago that counted as groundbreaking. Then, capitalism being what it is, some retailers decided it would be worth it to sign exclusive agreements with Discover and thereby give those retailers’ customers even greater discounts. Or maybe Discover initiated the process, it didn’t really matter. Either way, the strategy was the same: What if we, the card issuer, could throw some extra business your company’s way: how much would you pay us? Under such a system, everyone wins. Discover gets more customers, who then carry greater balances. Those retailers (Home Depot and 1-800-Flowers, among many others) get more business for the small price of an extra 1% discount. And oh yeah, the cardholders get the same stuff for less money. What’s not to love about this?

Today, Blue Cash Everyday® gives you money back in $25 increments. We don’t know if American Express offers non-cash rewards, such as discounted magazine subscriptions or sleek pen-and-pencil sets (perfect for the unimaginative Bar Mitzvah guest), and we don’t care. Because nothing beats cash. When you check your account every month, ensure that the refunds make their way to your account as credits, without you ever seeing them in any tangible form.

One more thing. Depending on how much and what you spend, you want to ditch girl-next-door Blue Cash Everyday® for her sluttier uptown friend, Blue Cash Preferred®. The latter costs $75 a year, which is $75 a year more than the former. However, you get an additional 1% at those aforementioned stand-alone gas stations and select department stores, and an additional 3% at stand-alone supermarkets.

A total of 6% savings on groceries? In what’s already one of the smallest-margin businesses in the world? How can they offer that? Not our problem, and we don’t care.

Actually, the 6% comes with the same asterisk that Blue Cash Everyday®’s grocery savings do. The 6% is valid up to only $6000 in a calendar year. So you get an extra $180 if you buy $6000 worth of groceries. If you’re looking for the break-even point, you’re coming out ahead with Blue Cash Preferred® after you’ve spent $2500 on groceries. That’s only $6.85 a day, so it’s a foregone conclusion that you’re better off paying the $75 and getting the Blue Cash Preferred®, right?

Read the fine print. Stand-alone. At CYC World Headquarters, barring unusual circumstances we buy our groceries at 2 stores and 2 stores only – Walmart, which isn’t stand-alone, and Winco, which doesn’t take credit cards. Oops. Narrowly avoided a $75 expense there.

So for us – and your mileage may vary – we’d have to spend $7500 a year on stand-alone gas and designer clothes to make Blue Cash Preferred® worth our while. For us, gas expenses run about $5000 a year per card. Then, considering that one of the CYC principals wears a tie just once a year (during an inevitable speeding ticket court date) and claims to have recently made it 12 months without buying a single article of clothing – not to be hyperfrugal, but because it just never came up – the idea of having to load up on an additional $2500 of cocktail dresses and suits doesn’t seem worth it.

Of course, it might be easy to imagine a scenario in which Blue Cash Preferred® makes sense for you. You might not even have to imagine, because you’re already living it. Either way, we’re holding fast with both Blue Cash variants as our recommended general cards.

EPILOG: Don’t waste your time with American Express Blue (no “Cash”), a weaker variant by which it takes forever to bank discounts and you get them back in $100 increments. Not worth it.

 

*Those are Bealls, Belk, Bloomingdale’s, Bon Ton, Boscov’s, Century 21, Dillard’s, JC Penney, Kohl’s, Lord & Taylor, Macy’s, Neiman-Marcus, Nordstrom, Saks Fifth Avenue, Sears and Stein Mart – at least 2 of which we’d never heard of, one of which we’d only heard of because they sponsor a bowl game, and one of which we thought was a real estate franchise. That last one you can blame on us being unsophisticates from west of the Hudson.