With so many credit card options available it can seem daunting to pick the right one. In this episode of Money Flow, we interview Tom Rose, WECU’s Director of Consumer Lending.
Learn more about WECU’s credit card options by visiting https://www.wecu.com/personal-banking/credit-cards/
Transcript:
Keith:
With so many credit cards available, picking one can seem overwhelming. To help break things down, on this episode of Money Flow, we have Tom Rose. Tom is WECU’s Program Manager for cards and he has over 15 years of banking experience. Tom, thanks for taking time to join me.
Tom Rose:
Thanks for having me, Keith.
Keith:
So diving right into the conversation. Ultimately, when you’re making your regular purchases, either in person or online, it breaks down as I understand to basically two options; you have a debit card and you have a credit card. What’s the best way to understand these two different options?
Tom Rose:
Sure. Well, a debit card really is, think of it as a tool. It’s a device to access the money that’s in your checking account so you can spend it. And in a world where we don’t really do checks anymore, this is how we get at our money. But debit cards, because they’re a tool, they don’t really come with a lot of benefits or features, things like that. They’re really just a way of getting at your money.
Whereas a credit card can come with benefits, can come with features, miles, cash back, all of these different things. And of course, a credit card isn’t spending your own money; it’s accessing a revolving line of credit that you can pay down over time, pay back over time. It’s a great thing to use, especially with big purchases. And with traveling; if you’re traveling and your card is compromised, you’re not out that money out of your checking account.
The other thing that I like to bring up when it comes to credit cards is hotels and rental cars. They love to put those big holds on your account. Well, if you’re planning on using the money in your checking account while you’re bopping around Hawaii or whatever it is, but Enterprise has put a $1,000 hold on your card because of this rental car you have, that’s going to really deter you and not really allow you to spend your money. So a credit card’s a good option for those.
Keith:
So to just reiterate; debit card, you access your money, it’s simple, and really there’s not the risk of paying a bunch of big fees or paying interest if you don’t pay back the money. But with a credit card there’s benefits, but then there’s also these, I guess, for lack of a better term, little risks.
Tom Rose:
Yeah. Definitely, yeah.
Keith:
I feel like everywhere you go, from Costco to Macy’s to the evening news, you see ads for credit cards. I would assume there’s probably some money to be made in the credit card industry.
Tom Rose:
There is absolutely money to be made in the credit card industry. I can say for me, I easily get 10 offers a week in the mail. It’s pretty much the only mail I get anymore.
There’s a number of different ways they earn money. Number one is the obvious; interest. If I’m carrying a balance, I have to pay interest. I think a lot of people understand the idea behind that. But there’s also this thing called interchange where every time that you put your card in a machine, the merchant at the store that you’re at, has to pay a small amount of money and generally speaking, we’re talking pennies, 25 cents maybe to the issuing financial institution.
Keith:
Great. Yeah. Obviously there’s money to be made, which makes a lot of sense as far as why there’s all of these benefits. I think ultimately when you’re thinking about the decision to get a credit card and you’re breaking down the benefits versus the cost and all that kind of stuff, you want to make sure that whatever you select and however you use it, that it’s going to benefit you.
Tom Rose:
Exactly. I think the best place to start when you’re considering that is how do I spend my money? How do I think I’m going to use this credit card? Maybe if you’re someone that intends on carrying a balance, you want to really look closer at that interest rate and think about that, because a 25% interest rate versus a 9-1/2% interest rate on say a $10,000 balance, that’s a big difference. The benefits that you get at that 25% interest rate, very likely won’t outweigh what you’re paying in the interest.
If you’re somebody who likes to put all your spend on your card and you’re going to pay it down every month, then getting those benefits is really something you want to focus on. And there is benefits aplenty. Everything under the sun you can almost imagine, you can get a card that will benefit you, or benefit a charity, or all sorts of different things.
Keith:
I think that’s a really good point. I love that starting point for figuring out what the right card is for you. It’s understanding yourself. If you say, “You know what? I know myself enough to know that I might not pay this off every month,” interest rate more important. Now, if you feel like you can pay it off every month and you’re going to benefit from those extra incentives that the credit cards are offering for you to hold their card, that you look at something that has the most bang for your buck. Yeah, I love that way. Let’s continue to break this down. I think you mentioned it already, but there’s lots of different features. You see advertisements all the time; triple points, or airline miles, or bags checked, or all these different things. It probably is difficult to sort through all that. It’s not really always an apples to apples conversation.
Tom Rose:
Absolutely, it’s not. Really, you have to look at those benefits. Most of the credit cards that you see out there that have these really big, impressive benefits that you’re like, “Wow. Oh my gosh, five times points,” they probably come with fees. Now, if you’re a big spender and you pay that card down and you are able to take advantage of those five time points, well then a $500 fee per year might not be so bad. If you’re somebody who travels all the time and you’re constantly in airport concierge rooms and things like that, again, that five or $800 you might pay for that is worth it.
I don’t travel that much. I can tell you that. The two times a year I might go to the airport, I try not to get there ahead of time enough to even use a concierge service. So for me, probably not something I’d use.
Keith:
Right. Right. One thing that you mentioned there is this annual fee. I know that’s pretty common for a lot of different credit cards. I don’t want to put words in your mouth here, but ultimately when trying to compare apples to apples, it’s saying, okay, what’s the annual fee? Well, that money is going to be taken from your account. That’s going to be a cost. And so with credit cards, you want to make sure that your benefits or the associated dollar value of your benefits outweighs what that annual fee is.
Tom Rose:
Absolutely. I would agree with that. So if you compare maybe a WECU card to what I think everyone in Washington knows is the Alaskan Airlines card. Of course the Alaskan Airlines card it comes with your miles. You get free checked baggage. You get your $99 companion fair coupon. But if you only travel once a year, the fees you pay for that probably don’t outweigh those benefits that you’re getting. Whereas if you have say the WECU Choice card that earns 1.5 points for every dollar, which basically equates to 1-1/2%, it doesn’t have any fees, you could have a benefit there where you’re not paying the annual fee. You’re not getting those perks, but that $20 for that one time you fly and your check bags, well, that’s nothing compared to what you’re going to pay for the fees.
Keith:
Right. When you’re looking at let’s say that it’s just a simple, no annual fee, cash back card, maybe that’s not as “sexy” as one of these cards that have all these wonderful benefits. It might not be as exciting, but ultimately it all comes down to math.
Tom Rose:
Absolutely, it does. You’re right. When you say, hey, listen. We’ve got our WECU Platinum card, that’s a nice, low fixed rate, 1% cash back, it’s not the flashiest thing in the market, I’ll be the first person to say that, but if you go to these other cards and you get a metal card or you’re getting all of these 5, 4, 3, 2, 1 point tiers, and it’s all flashy and you feel so good holding it, but you’re paying a ton of interest and you’re paying annual fees for it and the benefits aren’t coming back to you, that card isn’t so flashy in my opinion.
Keith:
Right. Right. Yeah, a nice card design. I mean, there’s benefits there, rewards for different things, but I really like to get a little bit more granular, get a little bit practical. So you’re sitting here and you’re saying, all right, I’m aware of WECU, they have some credit cards, Alaska, maybe you’re aware of some other credit cards out there, I’m really trying to start breaking down the pros and cons of each and ultimately what’s going to benefit me. So would you start with, as we mentioned at the top of the conversation, maybe what are you currently spending, what would you typically put on that card?
Tom Rose:
Absolutely. That is the great place to start right there. Even thinking about credit line. How much credit line should I be asking for? How much credit line should I have? Obviously that kind of drives a bit too of how much benefit you can get from those benefits and rewards. If you’re someone who has a $10,000 credit line, well that gives you the ability to earn the equivalent of $10,000 in points versus 1,000.
I think it really is important to start with where are you at in your financial journey? Are you starting out? Are you learning? If you maybe are not in the highest of income points at this point, you might not want to get yourself a $20,000 credit card and get yourself down into a rabbit hole that could be tough to get out of. So you’d want to be probably looking for more of a thousand, maybe 2,000, $2,500 limit card that’s a little bit more manageable. And probably one of those cards that comes with some basic features, doesn’t have those big annual fees or anything like that. That gets you started. And then that gets you developing your credit file and all of that.
Now, if you’re somebody who maybe just doesn’t use a lot of credit and you have the ability to pay the card if you use it, well then maybe you want that higher credit limit, which may sound a little counterintuitive, that way you are able to have access to those funds in an emergency need. But if you’re not the kind of person that’s going to go out and charge yourself up beyond your means of being able to pay, it’s nice to have that in the emergency and you can get the benefit of using it in the smaller amounts in the meantime.
Keith:
So are you able to for instance, obviously the easiest example for us is just say WECU, so let’s say that you say, “Okay, I’m going to apply for this WECU credit card.” And we say, “Here’s a $10,000 limit.” Are you able to say, “Actually, I know myself well enough; I’d really only like a thousand dollars.” Is that possible?
Tom Rose:
Oh, it’s absolutely possible. We’re always talking about WECU of course. I mean, those are the cards you want to have anyways. Yes, you absolutely have control of the situation. You can tell an issuer at any time, even if you’ve had that card in your wallet for a long time, you can call up and say, “I don’t want to have $30,000,” or whatever it is, “I would like to have five.” And that should be something that would be honored for you.
Keith:
Great. So going back to the mathematical equation. So you figure out, okay, how much do I spend every month? Now I’m going to look at the annual fee. Is that something that is going to detract from the benefits?
Tom Rose:
Absolutely. Obviously no annual fee, it’s pretty easy; I’m not going to pay anything. But then start looking at those annual fees and what do you get for it. And then are you going to practically use those benefits, and are those benefits going to bring you more in return than what you’re paying for the fee?
Keith:
Great. I know that sometimes again, we’ve talked about it a couple times so far, but you say three times the points. I know that maybe doing a little bit of Googling to say what’s the dollar value for a point.
Tom Rose:
Very interesting question. There’s no pat answer to that. Every credit card issuer is different. Do not assume one point equals say one penny. They could be giving you three times points, but when you go to redeem those points, they value them at say half a penny. That’s the value of them when you go to redeem them. That might not be how you accrue them. Generally speaking, $1 equals one point, or if it’s three times points, $1 equals three points. Fairly common among all of the cards. But it’s the flip side of that equation. And that’s not something that’s advertised. They don’t tell you that, oh your points they’re actually only worth 25 cents at the end of the day. They’re not worth 1.1 penny.
Keith:
Such a huge point when you’re talking about how to evaluate all of these different offers that are out there. So to reiterate, when you’re looking at a card, do individual research on that card to see the value of the points.
Tom Rose:
Absolutely, if you can. It’s tough to find sometimes to be honest. It’s not something that’s readily advertised.
Keith:
I’ve heard many times the old adage that says, “If you don’t understand it, don’t buy it.”
Tom Rose:
That’s probably a very good analogy for this. If you’re reading through and you can’t make heads or toe of it, when you can’t understand it, it’s probably not the card for you.
Keith:
Yeah, that’s great. Again, just to reiterate the mathematical equation we’re going through. So you say I’m going to spend $500 a month. And credit card A has a 1 cent per dollar benefit. Subtract the annual fee. And then ultimately you’re able to start comparing card A to card B to card C, and you’re able to make that mathematical conclusion on what the biggest benefit to you might be. Does that sound about right?
Tom Rose:
That’s absolutely right. The WECU Classic or Platinum cards are 1% cash back, and the WECU business card, 1% cash back. So that really is truly $1 equals one penny. So you can sit there and say, okay, if I’m going to spend $500 a month, then that’s five bucks a month if I’m doing my math right here. And so you say, okay, well five bucks a month. That’s not that great. Okay. Well, but if you have a card that gives you say three times points and you’re spending 500 bucks a month, but it has a $500 annual fee, well that math doesn’t really work out so much anymore. All of a sudden that $5 a month doesn’t look too bad.
Keith:
Right. Right. Yeah. So this kind of mathematical equation, actually comparing card side by side, would you say that’s something that is often overlooked for consumers?
Tom Rose:
I think so. Yeah, quite a bit. Companies spend so much money on this flashy advertising and these big, giant 0% rates on the front, or three times, five times points. They’re designed for you to open them up and go, “Wow. That’s so cool. A metal card,” Or a “graphite card,” or, “five times points.” You can’t stop there. You can’t just read the top line of the advertisement and then just stop.
You mentioned it before, there is money to be made in credit cards. I guarantee you that the issuer of that card, regardless of the benefits they give you are going to make their money. So that means that you’ve really got to look into all those other things behind the scenes because if you’re getting those big benefits, somebody’s making that money up somewhere.
Keith:
This is probably one of the dirty secrets of the credit card industry, but would you say that certain credit card issuers assume that some people won’t manage them well, and won’t ultimately net out a larger benefit?
Tom Rose:
Yeah, absolutely. I think that is something that is assumed is, well this person might rack up their card and have a $10,000 balance that we’re now charging 25% interest rate on. They’re only making the minimum payment, so they’re not spending on their card anymore, so they’re not earning any rewards, and now we’re going to charge them 299 a year for an annual fee.
Tom Rose:
In fact, one of the things I think you have to most be careful for, especially with people with either no or bad credit is sometimes these credit builder cards, there are some great ones out there, but there are also some that you will get approved and you’ll get your first statement and there are all sorts of fees and most of your card limit is already used up, because they’ve charged you up fees if you didn’t read those fine prints. There can be a lot of deceit in that area.
Keith:
It’s actually really refreshing to have obviously such an honest conversation about the credit card industry. I know that some people really just think that credit cards are so evil, but obviously we believe that they serve a real purpose in accomplishing things for people’s financial lives if managed well, if used to build credit. Our hope for our members is that they would, first of all, listen to things like this, get the education they need so that they know how to receive the benefit from a credit card, as opposed to paying more than they need to.
Tom Rose:
Yeah, exactly. Especially if you are not understanding the math or how it all works, as you’ve said, all of that equation that you put together, if you have a good relationship, whatever your financial institution is, which we hope is WECU, but if not, that’s all right, maybe sticking with your financial institution that you can go in and have a conversation with someone versus these national advertisements that you get in the mail.
Keith:
Great. Well Tom, super interesting conversation. I personally think it’s just fascinating to really understand the workings and all the kind of intricacies that go into a conversation like this. Hopefully it’s beneficial to our listeners. I just want to thank you for taking the time to join us today.
Tom Rose:
Great. Thanks for having me.
