Need credit card advice?

Whether you're trying to maximize rewards or minimize debt, we're here to help. Learn more about what makes CreditCardForum different from other sites.

Chase cuts 7% dividend on Sapphire Preferred: Do new insurance benefits make up for it?

Posted by on

The Chase Sapphire Preferred has long been a popular card among our forum users. The 1:1 point transfer you get for a bunch of popular travel loyalty programs, along with double points on travel and dining, can make this card a rewards powerhouse.

However, Chase recently eliminated one of the card’s perks – the annual 7 percent point dividend. The good news? The card is bulking up some of its insurance benefits for travelers.

What’s changing?

Hat tip to The Points Guy for going through the newest Sapphire Preferred membership packet and summarizing the changes:

1. Annual 7 percent dividend is going away. Cardholders used to get a 7 percent bonus on all new points earned the previous year. The change is happening immediately for new applicants, although existing cardholders are grandfathered in for points earned in 2014 and 2015.

2. Rental car collision damage waiver (CDW) coverage will now be primary. This coverage used to be secondary, meaning the card’s coverage paid out only after your own auto insurance did.

3. Trip cancellation/trip interruption insurance maximum is increasing. This insurance reimburses you for expenses you pre-paid (such as flights and hotels) if you need to cancel your trip or cut it short for a covered reason. The coverage maximum used to be $5,000. It will now be $10,000.

What do these changes mean for me?

That depends on how you use the card — and on your traveling habits. Here are some things to consider about each of the changes:

Nixed 7 percent dividend:

Anniversary gifts like this one are hard not to like. They’re effortless (you use the card, and the issuer deposits the bonus in your account), and they can help justify keeping an annual-fee card around.

Yet, while this perk was nice to have, it probably wasn’t worth much to low spenders. Let’s say you spend $12,000 a year on the card – and that half of that was on travel and dining. You’d be looking at 18,000 points earned in a year – and a 1,260-point dividend. Better than nothing, to be sure. But that’s only about $13 cash back. Or 1,260 frequent flier miles/hotel points if you use the card’s point-transfer feature. That might help you top off your rewards balance – but it’s not enough to get you a free flight or hotel night on its own.

The bottom line: It stings to have free points taken away. High spenders (who could expect to earn thousands of points a year, or enough for a free hotel night) will miss the dividend – and possibly find it harder to justify keeping the card around. For lower spenders, however, the dividend probably wasn’t a make-or-break perk, considering the other robust benefits of the card.

Primary auto insurance:

This is an extremely rare benefit among rewards cards. Not even the $450-pear-year Platinum Card from American Express (a CreditCardForum advertising partner) offers primary coverage for rental cars. Chase’s United MileagePlus cards have it, however.

As with secondary coverage, primary coverage will save you money every time you rent a car because you can turn down the rental agency’s pricey coverage. Yet primary has an advantage over secondary, as it kicks in right away. There’s no need to file a claim with your regular auto insurance provider first (as you do with secondary coverage), meaning you wouldn’t have to worry about increased premiums.

Just keep in mind that there’s still one big coverage gap, even with primary insurance. Here’s what Chase DOES cover:

CSP auto rental coverage

Missing from that list are the damages you do to OTHER vehicles, property and people. You’ll need liability insurance for that, and that will have to come from your regular auto insurance (check to make sure it covers rentals) or from the rental agency (in the form of supplemental liability insurance, which you can buy at the counter). There are also excluded vehicles and countries.

The bottom line: If you get in an accident that damages other cars and property, and results in injuries, the Sapphire Preferred card’s primary insurance will not cover the bulk of the damages. But you can lean on the card’s coverage if vandals key your car, or a tree branch falls on it. Because the coverage is primary, you don’t have to file a claim with your regular insurance company and risk higher premiums for those minor incidents.

Increased trip cancellation/interruption coverage:

The jump from $5,000 to $10,000 is a generous increase, considering the Citi AAdvantage Platinum World MasterCard and Barclaycard Arrival Plus World Elite MasterCard (which have $95 and $89 annual fees, respectively) offer $1,500 in coverage.

But just because the coverage maximum is doubling doesn’t mean this perk will benefit you twice as much.

The first factor to consider is how much you spend on prepaid travel expenses. If you take one trip a year and pay $2,000 for flight, hotel and other prepaid reservations, that extra $5,000 in coverage doesn’t give you anything you weren’t already getting.

However, if you travel with a big family or take expensive vacations, the jump to $10,000 in coverage will be a welcome increase. Instead of having to buy extra stand-alone coverage, you can rely on your card’s coverage for those pricier trips.

The card’s trip cancellation/interruption insurance covers you, your immediate family members and traveling companions. There are some coverage holes, however, that may warrant a stand-alone policy:

  • Pre-existing conditions
  • Cancellations due to job conflicts, business obligations or job loss

Both these circumstances can be built into stand-alone policies, if you buy within a certain number of days of booking your travel. For example, I recently bought a stand-alone policy for an upcoming trip. The cost was about $100, combined, for me and my traveling companion. I had the option to add coverage for pre-existing conditions (if I bought insurance within 15 days of purchasing my travel). The policy I chose also covers cancellations due to involuntary termination of employment and “requirement to work” (which involves cancellations due to work-related emergencies) – this coverage includes self-employed people and was a necessity for this trip, given that I’m traveling with a small-business owner.

Bottom line: Despite a few gaps in coverage (that some travelers may need to fill with a stand-alone policy), the coverage on the Sapphire preferred is robust and will probably be enough for many travelers. Plus, it’s offered at no additional cost (aside from the card’s $95 annual fee) and is automatic if you use the card to book the travel you want to insure (no additional paperwork necessary). If you travel several times a year, you’ll probably derive some peace of mind from this benefit, especially if you take pricey trips.

Are the changes an improvement or downgrade?

Chase is eliminating a benefit that had an easy-to-calculate monetary value (the dividend) and beefing up benefits with a value that’s harder to ascertain.

To find out if the card is still worth the annual fee for you, figure out how much you were getting from the dividend. If you were paying $95 to hang on to the card for a few bucks worth of dividend points, it’s probably time to reevaluate that, regardless of the changes.

However, if this is your go-to card for travel perks, trip protection and point transfers, it might now be even more valuable to you, even without the dividend.


-----
Editorial Disclosure: The editorial content on this page is not provided by any bank, credit card issuer, airline or hotel chain, and has not been reviewed, approved or otherwise endorsed by any of these entities. Opinions expressed here are author's alone, not those of the bank, credit card issuer, airline or hotel chain, and have not been reviewed, approved or otherwise endorsed by any of these entities.

Reward card churning requires credit caution

Posted by on

Travel card sign-up bonuses can range from 25,000 to 100,000 miles (for certain targeted, limited-time offers). Get a bunch of those, and you’re flying free around the world.

That’s why plenty of rewards enthusiasts chase sign-up bonuses as a hobby, regularly applying for multiple cards with lucrative sign-up bonuses simultaneously and then cancelling before the annual fees kick in. But this strategy isn’t for everyone, and would-be card churners need to know the financial and credit consequences.rewards trap

“I understand the desire to chase sign-up bonuses,” says credit expert Linda Ferrari. “Every time I log in to my airline accounts, there’s another amazing offer of how I will get 40,000 bonus miles by opening a new card and spending $3,000. … The only advice I have is that consumers become more aware of the impact the process of opening multiple accounts in a short period of time can have on their credit worthiness and scores.”

Still want to try churning? Done correctly, it’s a delicate balancing act between chasing sign-up bonuses and creating the stable credit history that makes new approvals possible. Here’s how to churn without getting burned.

Why churning can hurt your credit

The immediate effect of numerous credit applications are the numerous hard inquiries (or “pulls”) that appear on your credit reports when lenders check your credit. Those pulls are a “red flag” to lenders looking at your reports, Ferrari says, because they suggest you’re desperate for credit. They’ll temporarily ding your credit scores, too.

“How many [points you'll lose] depends on where your credit is at the time,” Ferrari says. “The higher your credit scores, the less points you will lose for a hard inquiry. The average is five to 10 points each inquiry.”

Hard inquiries fall off your reports within two years. FICO factors them into your score for just six months. But rewards churners often have a constant stream of new applications, and those will “clutter up” your credit reports with inquiries, says Ferrari.

“The highest credit scores I see are on reports that have very little clutter,” Ferrari says.

Another potential credit consequence is tied to the spending requirements — the amount you must spend in the first few months of card membership to get the bonus. If your credit limit is low compared to the amount you’re required to spend, you might come close to your credit ceiling, another factor that can drop scores.

Ferrari pull quote“In order to get the rewards, you have to spend, right?” Ferrari says. “How we use and manage our credit cards makes up 30 percent of our credit scores, and all it takes is one maxed-out credit card to drop a score by 75 points. Imagine what three to five maxed-out cards will do.”

Making it work

It’s possible to churn responsibly, those with experience say. But you need to take your circumstances and financial goals into account every step of the way.

1. Start small

“It’s good to get practice before you join the big leagues,” says Scott Mackenzie, owner of travel rewards site Hack My Trip.

Some seasoned bonus chasers may apply for as many as five or six cards in one go. Mackenzie recommends starting with two or three.

That lets you test your endurance for meeting all the cards’ spending requirements (which can be daunting) and tracking all their balances and due dates. You’ll also avoid getting into a lot of credit trouble right off the bat. If you’re rejected (perhaps because of credit report errors you weren’t aware of), at least you end up with just a couple wasted hard pulls instead of half a dozen. Plus, some banks ask on their applications if you’ve been denied credit with them before. Checking the ‘Yes’ box won’t automatically doom future applications, “but it would be great if you could just say ‘no’ to that question and say you’ve always been approved,” Mackenzie says.

2. Batch your applications

After your trial run, separate future applications into batches of several cards, says Ariana Arghandewal, founder of rewards travel site PointChaser.

“You’ll apply for maybe four cards at the same time from four different banks,” she says. “And you want to get [those applications] in at once. After 90 days, you can apply for four other cards.”

The advantage of simultaneous applications is that banks get spooked if they see fresh inquiries. Applying for several cards at once, in theory, ensures that banks won’t see the other cards you just applied for because it takes time for inquiries to show up on your credit reports.

“But I’ve heard other people say banks are smarter than that, that they see real-time updates in their system,” Mackenzie says.

Still, there’s another advantage to synchronized applications that has nothing to do with approvals:

“If all those inquiries are on the same day, they’ll drop off your reports at the same time,” Arghandewal says.

3. Be choosey

You don’t want to waste a credit pull on a sub-par bonus offer. Plus, not all cards will allow you to apply for a new, better sign-up offer if you’ve already been approved for a ho-hum offer on the same card. So, it pays to know when to pounce — and that comes from experience. You have to know that a card usually offers just 25,000 miles or points to know that an offer of 50,000 is worthwhile.

“That’s a strategy for a lot of things, whether it’s a credit card or buying a plane ticket,” Mackenzie says. “You need to always be searching around so you know whether an offer is a regular one or a good one.”

4. Respect the minimum spend
New cards obtained in quick succession means contending with multiple spending requirements standing in the way of your sign-up bonuses.Arghandewal pull quote2

“If you don’t meet the minimum-spend requirements, you’ve got these hits on your credit, and you don’t get the miles,” Mackenzie says.

Spending requirements might be chump change to those with high incomes or who can funnel work expenses through a card. Others can reach them, too, if they time their applications wisely. Mackenzie once timed a $10,000 spending requirement with a large tax bill and knocked out a couple more with wedding expenses last year.

Whatever you do, don’t use a sign-up bonus as an excuse to spend more than you otherwise would.

“If you’re a person who can’t handle a $10,000 spending requirement, and you’re not familiar with ways you can achieve that, don’t take that on,” Arghandewal says. “A lot of people go off and spend more than they need to.”

5. Get new cards, but keep the old

A long credit history strengthens FICO scores. So how do you maintain that with high card turnover? Have a core group of cards that you never close, Mackenzie and Arghandewal say.
Among their keepers are cards that offer travel benefits or anniversary gifts (like free hotel nights or companion fares) that offset the annual fee.

“If I can make it worth my while, I’ll keep a card if it pays for itself,” Arghandewal says.

Arghandewal also points out that American Express (a CreditCardForum advertising partner) will backdate your cards to your oldest account. So a brand-new card will register as a five-year-old account, if your oldest AmEx happens to be five years old. This unique policy can boost your average age of accounts and help stabilize your credit profile.

Mackenzie suggests using your keeper cards as a foundation for later churning.

“If there are four cards you want to keep, apply for those in your first year,” he says.

6. Don’t carry a balance — ever

If there’s one cardinal rule that grounds you while you’re off chasing bonuses, make it this one. Carrying a balance and accumulating interest charges will cancel out any rewards you earn.

“These cards have annual fees, they have high interest rates,” Mackenzie says. “They make their money somewhere. You don’t want to be the schmuck who’s paying for someone else’s rewards.”

7. Maintain a hands-on approach

Keep a watchful eye on all your accounts. You don’t want late payments marring your credit. Plus, you’ll want to keep your credit utilization in check, as high utilization weighs down credit scores. Even if you pay in full each month, a high credit utilization can still get reported to the bureaus because banks often report your balance the day your statement cuts – not the day you pay.

Mackenzie pull quote“Pay your balances off before the statement date so the balance that gets reported to the credit bureau every month is under 30 percent,” Ferrari suggests. “That way you will mitigate some of the point loss due to the new hard inquiries and credit.”

Arghandewal uses that strategy, making a payment on her cards every two weeks.

8. Don’t compromise bigger financial goals

Got plans for major loan applications? Scrub your accounts of anything that will give a lender pause.

“Manage your balance-to-limit ratios based on where you are in your life and when you plan to use your credit,” Ferrari says. “If you plan on purchasing a home or car, you will need to pay down your new credit card balances to under 30 percent, two or three months before you apply.”

And cool it on the churning.

“If you’re planning to apply for a loan in the near future, you don’t want to be applying for cards right before that,” Arghandewal says. “You don’t want to take that hit on your credit. It will affect your interest rate, and that’s not worth the rewards you’ll be getting.”


-----
Editorial Disclosure: The editorial content on this page is not provided by any bank, credit card issuer, airline or hotel chain, and has not been reviewed, approved or otherwise endorsed by any of these entities. Opinions expressed here are author's alone, not those of the bank, credit card issuer, airline or hotel chain, and have not been reviewed, approved or otherwise endorsed by any of these entities.

5 dynamic credit card duos

Posted by on

Each rewards card has its own strengths but, often, a tag-team strategy is best for maximizing rewards. While one card may shine in certain spending categories or provide glamorous travel perks, another might be more of a rewards workhorse for every-day purchases.

So it’s best to combine their powers. These five credit card duos work best in tandem.

1. Chase Freedom + Chase Sapphire Preferred

Think of the Chase Sapphire Preferred ($95 annual fee) as the super hero with special powers and the Chase Freedom (no annual fee) as the faithful sidekick.

The Chase Sapphire Preferred (in addition to earning you 2 points per dollar on travel and dining), has the ability to transform points earned on the card into real loyalty points for several airline and hotel programs, as well as Amtrak Guest Rewards:

Chase travel transfer partners

Because it’s a 1-for-1 transfer (each CSP reward point yields one loyalty program point), you can get a lot of value out of your points if you then redeem them wisely.

So how can you get as many points as possible to transfer to these programs? That’s where the Freedom comes in. It has rotating 5 percent categories, allowing you to rack up points for gas, home improvement purchases, online shopping and more. Once you have a bunch of points, transfer them from the Freedom to the Sapphire Preferred online:

transfer-pts

… then transfer the points again into the travel loyalty program of your choice.

The bottom line: The Freedom allows you to farm points, and the Sapphire Preferred allows you to dispatch them where they’re needed.

2. American Express Platinum + American Express Everyday

(American Express is a CreditCardForum advertising partner)

Are you a fan of the travel and insurance perks of the Platinum card (which carries a $450 annual fee)? The roadside assistance, concierge, $200 airline fee credit and lounge access can be quite valuable – but the point-earning rate on the Platinum isn’t that great (1 point per dollar spent).

The no-annual-fee Everyday card, meanwhile, earns Membership Rewards Points (MRPs), just like the Platinum card does. But it earns you 2 MRPs per dollar on groceries, 1 point per dollar on everything else and a 20 percent point bonus after you make 20 purchases with the card in a billing period. Once you hit that threshold, you can start padding your MRP balance quite nicely. The Membership Rewards program is versatile: You can use MRPs to cancel out charges, redeem them for gift cards, convert them to loyalty points in more than 20 travel programs or use them to shop online.

The bottom line: The Platinum packs the perks coveted by frequent travelers, while the Everyday card, for no extra cost, picks up the point-earning slack.

3. A 5 percent category card (like the Chase Freedom or the Discover it) + the U.S. Bank Cash+ card

If your goal is to earn as much cash back as possible, this combo will keep you earning a pretty steady 5 percent back (the highest you can get on no-annual-fee cards).

The Chase Freedom and Discover it (both with no annual fee) have 5 percent cash-back categories that change quarterly. You earn 5 percent cash back on up to $1,500 in purchases each quarter.

As an example, here’s Discover’s calendar for 2014:

Discover 5 percent Cashback Bonus Calendar 2014

And here’s Chase’s:

Chase Freedom 5 percent cash back calendar

So pick one (or both). Then supplement it with the U.S. Bank Cash+. This card is unique in that it’s customizable. You get to pick two 5 percent categories (good for up to $2,000 in net purchases) and one 2 percent category – and change them each quarter:

US bank cash+ 5 percent

That means you might be able to plug some of the 5 percent holes left in the other cards’ calendars and get 5 percent back on a variety of spend categories year round.

While your Discover it is getting you 5 percent cash back on holiday shopping in Q4, your Cash+ could get you 5 percent on restaurants. While your ‘it’ gets you 5 percent on restaurants in Q1, you can recalibrate your Cash+ for department stores. You might also be able to flex both cards for a single project. For example, if you’re getting a new house, you might use the home improvement category on the ‘it’ or Freedom and then switch to the Cash+ card to get 5 percent back on all your new furniture.

The bottom line: With a little planning and willingness to maximize categories, you’re getting 5 percent on multiple categories year round. The Cash+ card adds the flexibility lacking in the ‘it’ and Freedom cards.

4. American Express Blue Cash Preferred + Fidelity Rewards American Express

Consider this duo the counterpoint to the 5 percent-powerhouse combo above –for those who don’t want to mess with changing categories.

The American Express Blue Cash Preferred ($75 annual fee) gives you a rather high 6 percent cash back at supermarkets and 3 percent back at U.S. gas stations and select department stores year round (no rotating categories). For all other spending, you’ll use the Fidelity Rewards American Express card (no annual fee), which lets you earn 2 percent back on everything. You will need a Fidelity cash management, brokerage, 529 or retirement account to get the card. But because Fidelity’s cash management account essentially functions as a checking account, you can consider this card a way to earn 2 percent cash back and have your earnings automatically deposited.

Don’t have a Fidelity account and don’t want one? The no-annual-fee Quicksilver Cash Rewards card from Capital one gives you 1.5 percent cash back on everything.

Bottom line: You’re getting elevated cash back in three very common spending categories and 2 percent on everything else. No need to plan for categories – you’ll reach for the same card for the same types of purchases year round.

5. Chase Sapphire Preferred + Starwood Preferred Guest card

Airline cards with their generous sign-up bonuses can be great for those who live in a hub and know which airline they’re using for a big trip. However, if you’re a frequent traveler but not a frequent flier on a single airline, you’ll need reward points that are a bit more flexible.
Both of these cards let you transfer your points into travel loyalty programs. We covered the CSP’s partners above. The Starwood Preferred Guest card ($65 per year) covers more than 30 airlines (and all but a couple let you transfer on a 1-for-1 basis). Between these two cards, you’ve got United, American, Delta and Southwest covered, in addition to a slew of international carriers. Marriott, Hyatt and Starwood hotels are covered, too. If your carrier or hotel isn’t on the list, you can also use your CSP to book travel via Chase Ultimate Rewards – and get a 20 percent discount.

One caveat is that you’ll basically have two currencies of rewards – one cache with Chase and the other with AmEx – and no ability to move them from one card to the other before converting to airline miles. You might be able to find a work-around, though. For example, you could transfer points from both cards into British Airways Avios – and then redeem your Avios with American Airlines (a British Airways partner).

The bottom line: Together, these cards encompass nearly 40 hotel and airline transfer partners, and Chase Ultimate Rewards offers a back-up option for any travel that’s not included. That means just two cards are basically doing the job of a wallet full of airline and hotel cards.

What are your favorite card combos?

The best card combination for you will depend on your rewards preferences and your tolerance for annual fees, and our list is by no means comprehensive. Tell us in the comments: what’s the most dynamic duo in your wallet?


-----
Editorial Disclosure: The editorial content on this page is not provided by any bank, credit card issuer, airline or hotel chain, and has not been reviewed, approved or otherwise endorsed by any of these entities. Opinions expressed here are author's alone, not those of the bank, credit card issuer, airline or hotel chain, and have not been reviewed, approved or otherwise endorsed by any of these entities.

How not to get burned as an authorized user

Posted by on

You’ve heard about the risks of making someone an authorized user on your credit card account. But becoming an authorized user yourself isn’t always just a carefree joyride to excellent credit. There are risks – and credit reporting implications – to be aware of.

The main account holder’s behavior can hurt you

As an authorized user, you can do major damage to the account holder’s credit and finances, since the account holder bears all the responsibility of paying the account. But the main account holder’s behavior can damage your credit, too, says Beverly Harzog, credit card expert and author of “Confessions of a Credit Junkie.”pencil erasing bad credit

“Let’s say the primary cardholder starts behaving badly,” she says. “This also gets reported on the authorized user’s credit reports.”

That means you don’t just have to worry about your own credit conduct, but about the main account holder’s as well. The behaviors that ding you as an authorized user are the same ones that would ding you on your own account: late payments and high credit utilization.

“When it comes to credit utilization, over 30 percent is not good,” Harzog says. “If it gets to, say, 70 to 80 percent, that’s going to hurt the authorized user.”

There are credit-reporting differences

The whole point of piggybacking on someone else’s credit card is to build (or rebuild) your own credit. Yet the way that account appears on your credit reports (both while you’re a user and after you’ve been removed) and the way it factors into your FICO score may differ from how an account of your own would behave.

For one thing, some issuers may not report authorized user data to the three major credit bureaus. Still, it’s probably safe to say that cards from major issuers will, Harzog says. Assuming the account is handled responsibly, you can expect your credit to improve.

“In general, you’re going to get some boost,” Harzog says. “The question is how much boost.”

And that’s where things can get complicated. Here’s a run-down from FICO, Equifax, TransUnion and Experian about the credit reporting implications of authorized user accounts – and just how much control you have over the account’s presence on your credit reports:

FICO (information provided by spokesman Anthony Sprauve):

  • FICO factors an authorized user account into a FICO score differently from an account in your own name. Generally speaking, accounts you’re an authorized user on carry less weight. The specific details, however, are proprietary.
  • If you have a mix of authorized user and primary accounts, the authorized user accounts would contribute to your overall credit limit. And the balance on the authorized user account would contribute to the amount you owe. However, while the utilization ratio on an authorized user account does factor into the authorized user’s FICO score, “it wouldn’t carry the same weight as if it were an account where they were the primary user,” Sprauve says.

Even if authorized user accounts carry less FICO weight, piggybacking can still be a fruitful route to pursue, Harzog says.

“If you’re trying to boost your credit, even a little bit is helpful,” she says. “You just have to try everything you can within reason, even if it’s a little boost.”

Equifax (information provided by Meredith Griffanti, senior director of public relations):

  • Equifax reports both positive and negative information associated with the authorized user account.
  • If the main account holder starts being irresponsible with the account, authorized users can’t request that Equifax remove it (they would need to request that the creditor remove them from the account).
  • After the creditor removes the authorized user, the account should fall off the report automatically in 30 to 60 days. If the authorized user disputes the account, it should fall off within 30. Unlike regular closed accounts, authorized user account history does not remain on the report for several years.

TransUnion (information provided by Clifton O’ Neal, vice president of corporate communications)

  • Assuming the issuer reports both positive and negative information regarding the account, that’s what your TransUnion report would display.
  • If authorized users no longer want the accounts to report, they simply have to “dispute as ‘not mine,’ and the trade line will automatically and immediately be removed and will not show from then on,” O’ Neal says. The user will still be able to use the card; it just won’t show up on the TransUnion report.

Experian (information provided by Rod Griffin, director of public education)

  • An authorized user account will remain on your report only if it’s helping you: “An authorized user has permission to use the account, but is not responsible for the debt, so Experian will delete the account from the credit report if it becomes delinquent,” Griffin says.
  • Authorized users can request that the account be removed from their Experian reports, and Griffin recommends they also ask the account holder to contact the lender and remove them. After authorized users are removed, the accounts immediately disappear from their Experian reports.

Taking control as an authorized user

Though you can’t control the main account holder’s behavior, any damage should be short lived, as all three major credit bureaus purge the account’s history from your reports quickly, if not immediately after you’ve been removed from the account.

Still, the best thing you can do as an authorized user is vigilantly monitor the account, so you know when you need to jump ship. Any red flags (delinquencies and high credit utilization) will appear in your credit reports. You can get one free report each year from each of the three credit bureaus at AnnualCreditReport.com.

Because most cards from major issuers report to all three bureaus, Harzog recommends staggering your reports (getting a free one from each bureau every four months) to get a full free year of credit reporting. Free credit-scoring websites (such as Credit Karma and Credit Sesame) are another option. Although the scores they give aren’t real-deal FICOs (and are sometimes jokingly referred to as FAKO scores), they’ll let you monitor your active accounts for high utilization and late payments.

“They can help you keep track,” Harzog says. “Even though I don’t pay attention to the score, I look to see if there’s anything unusual.”

If you do need to abandon the account, contacting the issuer should take care of the matter. The account holder can also remove you, and some issuers allow them to do so instantly online. If you go the latter route, “keep it strictly business,” Harzog says.

“You don’t know why this person suddenly became a bad credit card holder,” she says. “Just say, ‘Thank you for your help’ and ask them to remove you. … Don’t ruin the relationship, but disengage from the situation.”

Despite some of the social and credit-reporting complexities involved, an authorized user arrangement can be a helpful leg up for someone who would have difficulty qualifying for a card on their own. While she’s cautious about recommending that friends and significant others add each other to their cards, Harzog says it’s a useful way for parents to help their children build healthy credit futures.

“As long as the primary account holder has excellent credit and the authorized user understands the rules and is willing to abide by them, I think it’s a very good way to boost your credit,” Harzog says.

If you’ve had bad luck with an authorized user arrangement and still need to build your credit, you’ve still got options. A secured card is one, Harzog says, and credit-building loans offered by some credit unions can also help you rebuild your credit solo.


-----
Editorial Disclosure: The editorial content on this page is not provided by any bank, credit card issuer, airline or hotel chain, and has not been reviewed, approved or otherwise endorsed by any of these entities. Opinions expressed here are author's alone, not those of the bank, credit card issuer, airline or hotel chain, and have not been reviewed, approved or otherwise endorsed by any of these entities.

Card holds can tie up funds while you’re on the road

Posted by on

Hitting the road this summer? You may be stopping at gas stations, staying in hotels, renting a car and dining out more often. If you also happen to be scraping the bottom of your bank account or nearing your credit limit, watch out: Using your card for those types of transactions could put you in a bind due to what are called “holds.” card payment at gas pump

What are holds?

Holds happen when you swipe your card before the final transaction amount is known by the merchant. Think restaurants (where you leave a tip after your card is swiped), gas stations (where you swipe before filling up at the self-service pump), car rental agencies (which don’t know whether you’ll return with an empty tank or damaged car) and hotels (which don’t know how much you’ll spend on room service).

In such cases, a certain amount of your money may get set aside to account for this unpredictability until the merchant is able to send the final amount to the bank. Using a debit card? Part of your bank account balance will be locked up. Using credit? Part of your available credit limit will be temporarily off limits.

Another way of putting it: You might pump just $30 worth of gas, but have a hold on your funds or credit limit for $50 to $100, until everything is settled (which can take anywhere from mere moments to a couple days).

“The idea is that everyone wants to get paid,” says Nessa Feddis, senior vice president and chief deputy counsel of consumer protection and payments for the American Bankers Association. “The concept [of holds] is a good idea. The challenge is to ensure consumers understand it and that they can anticipate it.”

Holds can happen with both debit and credit cards, although they tend to be less of an issue with credit.

“They do the same thing with credit cards, but it’s not as noticed because typically people don’t utilize their entire credit limit,” Feddis says.

How holds work

When you swipe your card, the merchant’s payment device instantaneously sends an authorization request to the issuer.

“It basically contacts the card issuer for a request of whatever amount, and the bank responds whether or not funds are available,” Feddis says. “And then if they (the merchant) get the authorization, they’re guaranteed they will get paid.”

If you’re buying groceries, the authorization is for whatever amount the stuff in you cart tallies up to. If it’s for a transaction with an unknown final amount, things are less clear cut. So, when requesting authorization, the merchant has to make somewhat of a guess:

Gasoline: With gas, the amount of the hold “is supposed to approximate the maximum amount that could be charged in that situation,” says Jeff Lenard spokesman for the National Association of Convenience Stores (NACS).

(Note: This hold is different from the tiny temporary $1 charge you might see if you log into online banking right after filling up. This little charge is simply made to make sure your card is live, Lenard says.)

Card holds pull quote FeddisWhat exactly this “maximum amount” will be varies by gas station and even within the same chain of gas stations, Lenard says. And it has fluctuated over time.

“Holds were something I spent more time a couple years ago, because it was a bigger deal when gas prices were high,” he says. “And those limits started to increase because the prices started to increase. Today, I don’t think you could say gas prices are low, but they haven’t hit the peaks of the last couple years.”

Dining: Restaurants might place a hold for the cost of your meal and an anticipated 20 percent tip. Those who have attempted to pay for a $100 meal with a $100 prepaid gift card are likely to have noticed this when the card is rejected (due to the need to hold a $20 tip).

Lodging: Hotels might place a hold for the cost of each night’s stay plus a certain percentage of that amount for incidentals.

If you’re staying in a hotel for several days, the hotel might place a hold each night, leaving you with a cumulative hold at the end of your stay, Feddis says. That’s good in the sense that you don’t end up with a giant hold on your funds at the outset (especially if you need that money for daily expenses like meals). But that cumulative hold toward the end of your stay might balloon to uncomfortable levels.

Still, as Feddis point out, that money being held “is not yours to spend anyhow.”
“You owe the hotel money,” she says. “You’ve promised to pay. They just don’t require you to go down every night and pay.”

Within the hotel category, there’s a lot of variation in hold policies, according to the American Hotel & Lodging Association, a trade group for the hospitality industry. Some hotels post their policies online. Starwood, for example, places an authorization hold at check-in for the cost of your stay, plus an undisclosed amount to cover incidentals. Hyatt, meanwhile, places holds only on debit cards (equal to the room rate, plus tax, and $50 per night for incidentals).

Not always a problem … but frustrating when it is

Lengthy holds apply only to non-PIN transactions (when you use a credit card, or select the “credit” option when using a debit card). PIN transactions (when you key in your PIN associated with your debit card) use a different infrastructure and are handled in basically real time. A hold is still placed on your funds initially, but it should fall off within minutes of the total being determined (for example, when you hang up the gas pump).

At a gas station, “there may be some instances where [the hold] still might be on there if you go inside the store right away and use the card again,” Lenard says. “But that’s probably the extent of it.”

Even non-PIN transactions at the pump may clear quickly as well nowadays. Many pumps have been updated with real-time processing capabilities. Instead of using batch clearing (which involves the merchant processing transactions at the end of the day), stations with updated pumps can send the final payment amount to the bank after you hang up the pump. If you log into online banking, you’ll see the exact amount on your receipt under your “temporary authorizations” – not a higher amount due to a hold. Visa explains here how it works. Not all gas stations (such as small mom-and-pop operations) may have integrated this process, however, Feddis says.

Given all this variation, holds can be a confusing – and frustrating – issue for customers. While someone with a high-limit credit card or big checking account balance might never notice the holds placed on their card, someone with a low-limit card or not much money in the bank is more likely to feel the pain.

Say you have $60 in your account (or left on your credit limit) and need $30 worth of gas. The station you’ve pulled into places a $75 hold. If you haven’t opted into overdraft protection (for a debit card) or given your issuer permission to let you exceed your limit (for a credit card), the merchant’s authorization request will determine that there aren’t enough funds for the purchase, and your card will be rejected.

… and if you do have overdraft protection or have opted in to over-limit transactions?

“That can unfortunately start a cascade of fees,” Lenard says. “… You think you still have $30, and then you go down the street and you buy $10 worth of stuff from one store and $10 from another store. You think you still have $10 left, but unfortunately, you’ve just been hit with three overdraft fees. And that’s beyond irritating.”Card holds pull quotes Lenard

Lenard also notes that road-trippers might find themselves in a predicament if a hold from earlier in the day prevents them from getting a hotel room that night.

“Unfortunately it might be the case where you don’t have access to your money,” he says. “… it could put you in a situation that’s not just inconvenient but potentially dangerous.”

As for merchants, holds put them in a tough spot as well. Although merchants initiate the hold when requesting authorization, it’s the bank that removes it – although customers may not know that. Plus, Lenard points out, a hold placed at the pump could tie up customers’ money and prevent them from loading up on snacks and drinks within the store, which is bad for the station owner.

“Angry customers aren’t good customers that day or thereafter,” Lenard says. “You don’t have many chances to delight customers, and if you aren’t able to because of something like that, it’s a bad day.”

How to stop the hold-up

If a hold remains on your card for more than three days after the transaction, contact your issuer, Lenard says.

As for dodging holds in the first place, if you can use your debit card and do a PIN transaction, both Lenard and Feddis recommend doing so.

“When in doubt, use PIN debit,” Lenard says. “That’s going to clear off the fastest.”

Yet PIN isn’t always possible (at sit-down restaurants, for example, where the waiter takes your card, or at hotels or rental agencies, which sometimes require you to use credit). Or perhaps, Feddis says, you’re waiting to get paid, have little money in your checking account and would probably be better off using credit.

Whatever your situation, ask the business how big the hold will be and keep close tabs on your accounts. If you’re on vacation, you might swipe your card more than usual, and knowing about any holds on your funds is instrumental to avoiding overdraft/over-limit fees and card rejection.

“And that’s getting easier to do, with mobile banking,” Feddis says. “It’s probably a good idea to be monitoring for budgeting purposes as well. It’s easy to lose track and get caught up in the moment.”


-----
Editorial Disclosure: The editorial content on this page is not provided by any bank, credit card issuer, airline or hotel chain, and has not been reviewed, approved or otherwise endorsed by any of these entities. Opinions expressed here are author's alone, not those of the bank, credit card issuer, airline or hotel chain, and have not been reviewed, approved or otherwise endorsed by any of these entities.