Archive | January, 2014

BofA boasts cash rewards of 3%, yet they cash in at 18.99%

11 Jan

“Cash in on life’s essentials” implores the envelop even before the offer is opened.

On their Cash Reward’s Visa credit card, Bank of America generously offers 1% cash back everywhere, 2% cash back at grocery stores and 3% cash back at gas stations. Best part, there is no annual fee.

But this stellar offer is only applicable on the first $1,500 spent per quarter. So if you spend $1,500 on just gas in a quarter, you’d receive $45 back. That’s the maximum cash reward that can be earned in a three-month span. Sounds like a lot of work for a mere $45 every 90 days, assuming only gas is bought on the card.

However, if you carry a $1,000 revolving balance on the card generating interest at the Cash Rewards Visa’s lowest interest rate of 18.99% for that same 90-day period, you’d pay $48 in interest, accounting for the daily periodic rate and compounding interest. When the average credit card debt for a credit card holder in the U.S. is $5,047, it’s not unreasonable to assuming $1,000 revolving balance in this scenario.

The point is very few will cash in on such reward cards. In fact, the credit card companies expect many people to never break even on these offers, allowing them to dish out diminutive cash rewards to the few who can manage paying off their balance monthly. While the only one who is truly cashing in on this scenarios is Bank of America CEO, Brian Moynihan, who received a $12.1 million pay package in 2012 (and all the other BofA execs).


Glossary: Annual Percentage Rate (actually charged daily)

8 Jan
Throughout this blog, there will be posts that define important terms to know when understanding credit cards. These posts and definitions will be summarized on my glossary page.

In theory, the Annual Percentage Rate (APR) is the interest rate charged annually on the outstanding balance of a credit card. For instance, if a particular credit card had an APR of 15%, and there was a $100 outstanding balance on that account for a year, the interest charged would be $15. However, when applied in actuality, it’s not so simply.

See, nearly all credit cards charge interest DAILY based on the DAILY outstanding balance using a Daily Periodic Rate (DPR). This is found by taking the card’s APR and dividing it by 365 days per year, generally round to the nearest 1/100,000th of 1%. So, going back to our example of 15% APR, the DPR would be 15% ÷ 365 = 0.041009589, rounded to the nearest 1/100,000th is 0.04101 interest charged on the daily balance. This may not sound like much, but with the effect of compounding interest added DAILY, it grows to be a big number quickly.

What’s compounding interest? Stay tuned for a future post that defines and illustrates the astonishing effect of compounding interest.

So, at the end of the day, the APR is actually just used to find and calculate the DPR, and actual interest charged on a credit card balance can end up being way more than the stated APR. Buyer (a.k.a. credit card holder) beware!

APR graphic relating to DPR

A graphic found on Bank of America’s website that simplifies how the APR relates to the DPR.

Citi AAdvantage card deceitful marketing tactics

1 Jan

Arriving today in a shiny large envelop was an offer to “enjoy a better travel experience”, or rather an offer for the Citi American Airlines AAdvantage credit card, or rather an offer to go into debt.

This unoriginal offer features a bonus 50,000 miles for those who spend $3,000 in the first three months. Sound familiar? This truly is an unfeasible bonus that most credit card holders cannot nor should not achieve.AAdvantage Credit Deceives wtih Freebies

The card requires a $95 annual fee. But have no fear, this fee is waived for the first twelve months.

The reward amount is one mile per $1 spent, with the exception of some eligible American Airlines purchases, which then earn two miles per $1 spent. The offer, however, conveniently stated this in reverse order with some strategic bolding, making it seem as though you would earn two miles per $1 spent.

Credit card direct mail deceitful advertisement.

Direct mail advertisement image: Misleading bolded text causes consumers to wrongly conclude they’ll earn two miles per $1 spent on purchases.

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