Today’s reader mailbag discusses credit cards, from getting your maximum cashback value and the basics of annual percentage rate.
1. APR vs. APY
2. Getting maximum Amazon rewards value
3. What are finance charges on a credit card?
4. Are Visa/Mastercard debit cards safe?
5. Which credit card debt should I tackle first?
6. How to destroy credit cards
What is the difference between APR and APY on a credit card? I used to think they were the same thing but I saw a CNBC segment where they were saying that they weren’t. Tried to look it up but all of the articles didn’t make much sense.
Credit cards typically quote you the APR rate on the card. The APR is the annual cost of borrowing money. It includes the interest charged as well as extra fees. That’s why, sometimes, you’ll find that the APR is higher than the interest rate — the APR is the interest rate plus fees. APR does not include compounding interest, as it assumes that you’re paying off the interest each month and it’s not adding to the balance of the card. If you charge $100 to a credit card that has 15% APR and don’t pay the balance at the end of the month, your card issuer will add $15 to the total balance you have to pay.
On the other hand, APY is what a bank will tell you when it’s talking about a deposit account, like savings account or certificates of deposit. That’s how much you’ll earn in a year if you deposit money with them. If a savings account has a 1.05% APY and you put $100 in there, you’ll have $101.05 at the end of the year.
It is worth noting that the actual interest rate on a savings account is just a little lower than the APY. Why is that? It’s because the interest is paid out throughout the year and added to your account. APY assumes that you don’t touch the accumulated interest, so the accumulated interest starts to earn interest itself. APY includes that.
[Read: Best Savings Accounts in 2020]
So, let’s say you put $100,000 in a bank account that has a 1% interest rate on it and it compounds monthly. That means 1/12th of the annual interest rate is paid into your account each month. After the first month, you would get 1/12th of 1% of the balance of your account — in this case, $83.33. Then your balance is $100,083.33, but then the next month you earn 1/12th of 1% of $100,083.33 — that’s $83.40. Now, your balance is $100,166.73, then the next month you earn 1/12th of 1% of $100,166.73 — that’s $83.47. Now your balance is $100,250.20. It keeps slowly growing on its own like that.
APY includes the interest that’s earned on the accumulated interest, while the regular interest rate does not. You shouldn’t typically see APY discussed with a credit card or other kind of loan, and you shouldn’t see APR discussed with a savings account or a certificate of deposit.
I have an Amazon Rewards Visa card. I use it for everything and pay it off in full each month. It generates 1% or 2% of my purchase value in Amazon credit and 5% of any Amazon purchases in Amazon credit. How do I get the most value out of this? I mostly just use the Amazon credit for holiday gifts for people.
The Amazon Visa card is really good for buying things from Amazon, but doesn’t measure up as well as other rewards cards for purchases outside of Amazon. You get 5% back on purchases at Amazon and Whole Foods, 2% back at gas stations and restaurants and drug stores, and 1% everywhere else, but that value comes in the form of credit on Amazon.com, not as cash.
Don’t get me wrong — credit on Amazon can be used for such a wide variety of goods and services that it’s about as close to cash as you can get without actually getting cashback. Even if you can’t get what you specifically want on Amazon, there are many other purchases in your life that you can make on Amazon using that credit, which frees up your cash to be used elsewhere.
The problem is the rate at which you earn rewards. If you use the card exclusively at Amazon and Whole Foods, it’s fantastic. Nothing will beat it. If you also use it for restaurants, gas and drug store purchases, you’re still doing pretty good. The question is how much of your purchases fall outside of that range; if a lot of your purchases aren’t at Amazon or Whole Foods, you’re only getting 1% back and you’re better off with a better rewards card for those purchases.
In other words, I’d probably pair the Amazon card with a card that offers strong rewards from the place where you buy your groceries (assuming it’s not Whole Foods). For example, if you mostly do your grocery and household supply shopping at Target, you might want to get the Target RedCard. If your main grocery store doesn’t offer a card that rewards you at better than a 2% rate, a good option might be the Citi® Double Cash Card card, which offers 2% cashback on all of your purchases. You could use that for everything that isn’t under the umbrella of the Amazon card. So, keep using your Amazon card as you are for Amazon, Whole Foods, gas stations, restaurants and drugstores, use the new card for groceries, and use whichever one happens to be better for other purchases.
What is the difference between finance charges and interest on a credit card bill? Aren’t they just the same thing?
This somewhat harkens back to the answer I gave to the first question. As I noted there, the APR quoted to you by your credit card issuer includes both interest rate and fees. Similarly, the “finance charges” on your bill would also include other fees beyond just the interest. If your credit card has an annual fee, that’s included, as well as things like late fees. It’s all wrapped up in the term “finance charges” on your bill. So, think of finance charges as including your interest and other fees you might have.
If you are paying your bill on time each month and your card does not include any annual fees, then the finance charges are usually just interest.
I always thought that you weren’t supposed to use debit cards for purchases because they are tied to your bank account and that gives hackers access to your bank. But now debit cards have Visa and MasterCard logos on them. Are they OK to use?
Credit cards are always safer for online commerce because of the reason you state. Credit cards are not tied to your bank account and thus, if something goes wrong, it’s not going to affect the cash you have sitting in the bank. Having said that, Visa and MasterCard offer a lot of consumer protection for people. Twenty years ago, when stores were first accepting debit cards, they often weren’t part of the Visa or MasterCard network, and thus you had very little protection. It was usually up to the bank if something went wrong.
Now, with Visa or MasterCard protection, you can usually get fraudulent charges overturned quickly and they’re usually really good at alerting you to anything fishy that might be happening with your account. That doesn’t change the fact that it’s still tied to your bank account. So, from my perspective, a credit card is still better than a Visa or MasterCard debit card in terms of consumer protections, but a Visa or MasterCard debit card is light years better than how things once were with debit cards.
I currently have these three credit cards:
Credit Card A: $2,400 balance, 19.9% APR, minimum payment $72
Credit Card B: $3,600 balance, 0% APR through December then 24.9%, minimum payment $20
Credit Card C: $7,000 balance, 17.9% APR, minimum payment $215
I am not putting any additional charges on those cards. I just want to pay them off. I am going to put $500 a month toward paying them off. What is the best order to pay them off?
First of all, you need to make minimum payments on all three cards as you’re doing this. Don’t miss the minimum payment on any of these cards if at all possible. Take what remains of the $500 and use that for extra payment on whatever card you’re focusing on.
I would start by paying off card B, card A, then card C. It’s easy to say that A is more important to pay off than C because it always has a lower interest rate. Since you’re only going to be making an extra payment of about $200 a month, though, the 0% APR on card B is going to vanish long before you can pay it off, so you should really focus on the 24.9% APR on that card and focus on getting rid of that balance first.
Along the way, it wouldn’t be a bad idea to try to transfer some of the balance to other 0% interest balance transfer offers, particularly if you can pay off those transfers in full before the end of the offer.
I have a large envelope of old credit and identification cards that needs to be destroyed. What is the best way to do this? I’d like to avoid having to cut up so many cards!
There are a number of things you can do here. The first thing you should do is destroy the magnetic stripe on the back of the card. Take something sharp and cut lots of little slices into the stripe so that it’s really scratched. If you have access to a really strong magnet, run that magnet repeatedly over the stripe.
Provided the card doesn’t have a metal core, you can run the card through a paper shredder. Most home paper shredders have the capacity to chop up a plastic credit card. Run it through at an angle so that the numbers are completely mangled. This will destroy any chip inside the card.
If you have a “community shredding” day offered by a local bank or by your town or city government, that’s a good way to destroy some cards. This is what I do — I just mess up the stripe on the back, then hold onto them until a community shredding day. If the card does have a metal core, you’ll need to return it to the issuer. Call the 1-800 number on the back of the card and they’ll let you know what you need to do to send in the card.
Got any questions? The best way to ask is to follow me on Facebook and ask questions directly there. I’ll attempt to answer them in a future mailbag (which, by way of full disclosure, may also get re-posted on other websites that pick up my blog). However, I do receive many, many questions per week, so I may not necessarily be able to answer yours.
We welcome your feedback on this article. Contact us at firstname.lastname@example.org with comments or questions.