Evaluating ‘spend-to-save’ credit cards
Friday October 27, 6:00 am ET
Spurred on by reports of record low savings rates and consumer feedback that they’re interested in putting more money aside for rainy days, several card issuers have introduced credit or debit cards that have a savings component.
"I think what makes it notable is that we’re in an environment right now where there’s been a lot of attention focused on the lack of savings," says Lynne Strang, spokeswoman for the American Financial Services Association, a trade group for credit and financial institutions. "We’re not saving enough."
With these new credit cards, a certain percentage of what cardholders spend is deposited into the user’s savings account. It’s similar to a rewards card, but in this case the reward is money in the bank instead of airline tickets or travel points.
"It’s a means to put something away for bigger-picture items," Strang says.
Monica Beaupre, spokeswoman for American Express, which launched its version — the One Card — in October 2005, agrees. "We wanted to be able to offer consumers who weren’t sure how to kick-start that savings plan a way to do that," says Beaupre.
One Card users get back 1 percent of the amount of their purchases ($1 for every $100 spent). It is deposited into a savings account with a 4.25 percent annual yield, she says. The company also puts in $25 the first time the account holder uses the card and suspends the annual $35 fee for the first year. Cardholders can add to the savings account as they wish. The interest earned is a variable rate so it will change periodically. The accounts are insured by the Federal Deposit Insurance Corp.
Emigrant Bank also offers a card for customers who have a savings account with its online division, EmigrantDirect.com. With Emigrant’s card, the reward depends on the balance of the account. If the account holders have less than $10,000, they receive deposits twice a year equal to one-half of 1 percent of their total card purchases for the past six months. If the balance is $10,000 or higher, the users receive 1.4 percent of their purchase totals. The money goes into a savings account currently offering a 5.15 percent return.
"It’s encouraging them to keep their money in the savings account," says Janet Martin, chief administrative officer of Emigrant Bank. "If someone had $8,000, we’ve seen them put that extra $2,000 in."
On the debit card side, Bank of America launched its "Keep the Change" program at roughly the same time. When a consumer uses the card, the total purchase amount is rounded up to the next highest dollar, and the difference between that and the actual cost is swept into a savings account. For the first three months, Bank of America matches the savings dollar for dollar. After 90 days, it matches 5 percent.
"It’s been a very successful program," says Diane Wagner, spokeswoman for Bank of America. As of August 2006, 3 million customers saved an average of $60 each, not including the matching money, Wagner says. "It gets you into the habit. If you’re spending, you can also be saving."
Over the long term
Can you save by spending? Opinions are mixed. While some contend that it’s a great way to save almost invisibly while you do what you normally do, others worry that consumers will spend more to get more savings and just dig themselves deeper into debt.
"I really like these types of accounts," says Curtis Arnold, founder of CardRatings.com, who estimates that there are probably about 50 cards on the market that offer some type of savings option. While some will set money aside in a 529 (education savings account), others "will let you put money in a high-yield savings account or even a brokerage account," he says. "It just depends on what you want."
Two he likes: the Citi Upromise Platinum Select MasterCard, which is tied to a 529 account, and the Fidelity Investment Rewards Visa card, which can be linked to several types of investment accounts, including brokerage accounts or IRAs.
Arnold likes the idea of giving consumers a savings option on the menu of their reward choices, especially since the industry has recently seen "significant scaling back of rewards programs," he says.
He says he’s heard good things from readers on the concept. "The feeling and feedback we’re getting is pretty positive," he says.
Initially, Arnold says, it could be a struggle for card companies to market the product. "Using a credit card to save is an oxymoron," he says. "It’s been a tough sell initially."
"But it does work — if you use the card responsibly and every month pay it off in full, as you should — it’s a great way to save," Arnold says.
Some finance gurus don’t agree. "It’s ludicrous," says Dave Ramsey, author of "The Total Money Makeover." "I’m going into debt so I can save money?"
Since consumers tend to spend more when they use plastic, he worries that that extra savings could come with a heftier price tag. "You’re trying to spend your way into saving," he says.
Here to stay?
So is the idea here to stay?
"The fact that there are a number of companies that offer variations shows that people seem to be interested in it," says Strang. "Whether that demand continues, we’ll have to wait and see."
So far, about 17,000 consumers are carrying Emigrant’s AmericanDream credit card, and the numbers are growing at the rate of about 1,000 per week, says Martin. "People prefer to get actual money deposited into an account rather than airline points or miles," she says.
It may be too early to tell if credit cards with savings options will become a trend. But for card issuers, the products are a method to build up loyalty and goodwill with customers. "From a business standpoint, it’s about customer retention and loyalty," says Strang.
In general, cash-based rewards programs are more expensive to run than rewards programs based on points or miles, because redemption rates are higher and consumers redeem cash-based programs more quickly than those involving points, prizes or tickets, says Dennis Driscoll, vice president of the loyalty group for Fidelity National Information Services, a full-service financial institution partner that services the financial services industry.
He says 99 percent of consumers redeem cash-based rewards, compared to 35 percent to 80 percent for some other type of bonuses. And consumers redeem cash within about six months, versus an average of two to four years for other types of bonus programs, he says.
With the Emigrant card, the company took the transaction fees it would have been getting on purchases and put them toward the savings program, Martin says. She doesn’t believe a lot of other companies will do the same. "What it means is: Do the other banks want to give up that profit margin?" she says.
How to size up that card offer
There are a lot of choices for credit cards with savings options, so, "The consumer needs to look at the options, read the fine print and look at the offer carefully," says Strang.
Some points to investigate:
• Is there an annual fee? If so, "that may offset what is put in the account for you," says Strang.
• Are you required to charge a certain amount before you get the savings contribution?
• How is the money distributed and when? At what point do you control that money?
• Can you access and control your savings account? Are you required to keep a minimum balance or make any contributions?
• Does the card echo your personal savings goals? If you want to save for your child’s education, does the card offer to put the money into a 529 account or something equally appropriate for what you need? "Match up the card to what’s in sync with your own personal goals," Strang says. "How does the card fit in to what I’m trying to achieve financially over the next two, three or five years?"
Don’t forget to put the card through the usual litmus test you use for acquiring new plastic: What’s the APR? What are the fees? Says Strang, "Those things are still important."