Credit Cards: Evil or Good?

Summary: When used wisely, credit cards are an excellent financial tool and can actually pay you to use them.

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Credit cards have a bad reputation in financial circles, and for good reason. Lots of folks have used them to spend more than they can afford, and then end up paying exorbitant amounts of interest because they carry a balance. The problem, of course, is not with the credit cards themselves, but with the behavior of the person. If – and this is a big if – you have self-discipline and only buy what you truly need and can afford, then using credit cards is actually a very smart financial move. The rest of this post assumes that you can use them responsibly – if that’s not true, then stop reading now. If it is, then it turns out that the credit card companies will even pay you to use them.

There are many posts you can read that will dive into this much deeper than I will, particularly if you want to use credit cards to “travel hack.” I will just briefly describe the somewhat haphazard way I’ve gone about this to demonstrate that you don’t have to be an expert to take advantage of this (while acknowledging that it can be done better if you take the time to become an expert).

Until fairly recently we were a one credit card family. We’ve always been disciplined about our spending and we started using a credit card early on and pretty much charged everything we could simply for convenience reasons. Then credit card companies slowly started introducing “rewards” credit cards in different flavors, and we went ahead and changed our one credit card to a credit card that earned us 1% cash back that went directly into the 529 college savings plan we had started for our daughter (more on 529 plans in a future post). We still just stuck with one credit card and didn’t really see the need for more than one. Flash forward a few years and suddenly reward credit cards are everywhere, and we also happen to be financially secure, including owing no debt, so didn’t have to worry about possible impact on our credit score (if you do it right, opening multiple credit cards isn’t that much of a concern anyway).

Since some of the new reward credit cards offered more enticing deals than simply 1% back into the 529 plan, I started researching them a bit. I discovered that not only did many of them offer more than 1% cash back (at least on certain items), but they also frequently offered bonuses for signing up. At first that seemed too good to be true (I mean, really, they are going to pay me to get their credit card?), but after investigating it turns out that it was legitimate. Credit card companies make their money from merchants (who pay a fee for each transaction), and from credit card users who don’t pay off their balances each month. (Part of me feels ethically conflicted about this, so that might be a reason not to do this if you feel that same conflict strongly enough.)

For a while we were pretty content with just that one, but then in 2012 we added in a Chase Freedom Card (*referral link). This card also offers 1% back on everything, but then 5% off on categories that Chase chooses each quarter. Those categories can change from year to year, but for 2017 look like this (fourth quarter has often included Amazon):

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This then became our primary card and we eventually cancelled our earlier card. While it was a bit annoying that the categories changed each quarter, it was still better because we still got the 1% on everything and then got the 5% on some things each quarter. I don’t have an easy way to tell how much we earned with this card then, but it would’ve definitely been more than with the earlier card. Especially because this was also the first time we got a “sign-up bonus” and I’m pretty sure it was $200 (it’s currently $150 after a minimum spend).

We stuck with this card for quite a while, but then in 2014 we added in a second card, the U.S. Bank Cash Plus Card. At the time we still had our checking account at US Bank (more about our switch to Ally Bank in a future post) so it was nice and convenient, plus in addition to offering 1% cash back on everything, it offered 5% cash back in two categories and 2% in one other category that you can choose each quarter. While it’s a bit of a hassle to choose those categories each quarter, it only takes a minute or two and can definitely add up. Here are the current 2% and 5% categories you can choose from:

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Because we also had (pre-defined) categories for our Chase Card, each quarter I check for what those categories are and then choose complementary categories for the US Bank card. For example, I usually choose the 2% for the US Bank card to be for groceries, except for the quarter that Chase offers 5%, then I’d switch it to restaurants. For the two 5% categories, we really only take full advantage of one of them – cell phones. We have a family plan that includes myself, my wife and my daughter, but also my sister, my mother-in-law and my father-in-law. We pay the bill and then they reimburse us, so the bill is somewhat significant each month. By charging it to this credit card, we get 5% back each month on that. Because we really don’t buy that much, the other 5% category isn’t that important, but we usually choose department stores for when we occasionally buy some clothes. Over the life of this card (since July 2014), we’ve earned more than $1800 cash back. I think the sign-up bonus for this one was only $25 once we redeemed $100 in cash back, but I think that for a while it was a $25 bonus every time we redeemed at least $100 (that’s ended now). The sign-up bonus right now ups the 5% categories to 5.5%, 2% to 2.5%, and 1% to 1.5%, all for the first year, then it drops back down to the normal levels.

It was nice having two cards in case there was a problem with one, and it was nice being able to juice our cash back a bit, and of course we always paid off the balance each month. We were content for quite a while with just those two, but then I kept reading more and decided to add in a third card – the American Express Blue Cash Preferred Card (*referral link) in December of 2016. This is a card that I honestly thought we would never get because it has a $95 annual fee. With all the no-annual fee cards, why would you choose to pay a fee? Well, it turns out the cash back on this card is more than enough to cover the annual fee and still earn us more than some other cards.

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First, the sign-up bonus included $150 cash back after a minimum spend, so that more than took care of the $95 annual fee the first year. If we decide it isn’t worth it, we can always cancel the card before the year is up and avoid the $95 fee for the next year. An additional sign-up bonus was 10% back on Amazon purchases for the first 6 months. We got this card right before Christmas, and we also have quite a few family birthdays in the first 5 months of the year, so we took good advantage of this. The on-going rewards include 6% back on groceries (this is where we come out ahead even with the $95 annual fee, which is why at the moment we don’t intend to cancel it), 3% back on gas and department stores, and then 1% on everything else. There is a $6,000 annual limit on the groceries, but conveniently one quarter we can use the Chase Card and get 5% back on groceries and then use the Am Ex for the other three quarters of groceries and stay within that limit. We now put restaurants for the 2% category for the US Bank card instead of groceries (although during the 3rd quarter we use Chase for restaurants because it’s 5%).

Now that we had three cards, I was feeling that was plenty. But then I needed to book an airplane flight to visit my parents this summer and ended up on a different airline than usual. When I was about to book the flights, up popped an offer for a branded credit card that would give me $100 cash back on that very flight. The rest of the benefits weren’t that great, but I went ahead and got the credit card simply to pay for that one flight. Now that the flight has been completed, I’ll cancel the credit card. (Haven’t yet just in case I need to book an emergency flight on this carrier in the next few months.)

Then, funny enough, because we got that credit card (which happened to be offered by Citi), Citi then tried to upsell us on another credit card, the Citi ThankYou Premier Card. It also has a $95 yearly annual fee, but it’s waived for the first year, and you can earn $500 in bonus points with a minimum spend, plus additional points for travel purchases.

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As it so happened, we need to book several flights for later this year and those, combined with paying our annual house insurance on this card, met the minimum spend. So we got this card, put the flights and the yearly house insurance on it, and got slightly over $575 in points between the bonus and the 3% bonus on travel expenditures. The only thing I didn’t really like with this one is that if you wanted to use those points for cash back, they were only worth 50% of the value. If you booked travel through their site, they were actually worth more than 100%, but I didn’t want to deal with that going forward, so instead we converted them into $475 in Target gift cards plus $100 at Red Robin. It will take us a while, but we do eat at Red Robin and shop at Target occasionally, so again it was basically free money. We’ll keep this card until our travel is completed, then cancel before we have to pay the annual fee.

After this one I was ready to take a break for while (although still planning in about 12 months to explore options again for additional reward and sign-up bonus opportunities), but then for our next Amazon order an offer popped up to get an Amazon Credit Card. This was something I had been planning on eventually doing because it gives you 5% back on Amazon purchases (had to wait until after the 10% cash back from the Am Ex card was done), so went ahead and did it now because they also offered a bonus of $70 cash back.

Now, at this point, this may sound a bit crazy to you, but it’s all pretty straightforward. As I mentioned previously, I’m not an expert on this, and there are many blog posts that explain how you can systematically go about this to optimize your rewards (especially if you want to use them for travel). But even just doing it haphazardly like we have can easily earn you more than $1000 in bonuses, plus probably several thousand a year in cash back. (There are enough cards out there, and you can even get the same card again after not having it for a while, that you can probably keep rotating through them and continue to get bonuses for quite some time.)

This only works if you’re fairly secure financially (helps you qualify for all these cards), and if you don’t succumb to temptation and use these cards to spend money you otherwise wouldn’t. It really does end up being pretty much free money at the cost of a very small amount of time, for items you would be buying anyway. Even if you don’t want to get multiple cards at the same time, make sure the one card you do have is the optimal one for your spending habits, then periodically see if it makes sense to switch to a new one that also works for your spending and allows you to earn the bonus.

Now, what should you do with all this free money? Well, it depends on your circumstances, but most of the good options involve investing it. I’d be happy to work with you to figure out the best way to do that.

photo credit

Your Next Car Should Be Electric

Summary: While there are a plethora of environmental and climate change reasons to go electric, your next car should be electric because it will save you money and time, and will make your life better.

 

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As I indicated in the Why You Should Go Solar post, I believe climate change is a huge issue and so I’m not exactly unbiased in this discussion. Having said that, I would be writing this post even without the environmental impacts of choosing an electric car. You should choose an electric car because it’s just a better choice of car for most people. (By the way, if you really want to build wealth, health and fight climate change, consider replacing one of your cars with a bicycle.)

There are lots of reasons to go electric, this guy lists 30 (only a few of them are a bit tongue-in-cheek). Let me (briefly) give you my top three:

  1. The most important non-renewable resource you have is time. Getting an electric car will give you more of it. No more gas stations (you start every day with a full “tank”). No more oil changes. Practically no more maintenance, rotating and changing the tires is about it – by one estimate there are about 18 moving parts in an electric car, compared to over 20,000 in a typical ICE (internal combustion engine) car.
  2. You will enjoy driving more. Electric cars drive like sports cars, let you merge into traffic much easier, and are incredibly quiet. If you like to drive and think, it will be so much quieter. If you like to talk or listen to podcasts, it will be easier. If you like to listen to music, it will be higher quality.
  3. You will save money. Right now, with current incentives, you will save money up front. Over time you will save money on fuel costs (depending on current gas prices, the electricity you use costs only half as much as the equivalent amount of gas), maintenance, and a longer usable life of your car (if you so choose).

I can happily go on for a long time, going more in-depth on the above reasons or discussing many others, but since you have access to Google and can readily find that on your own, I’ll spare you (at least in this post, in person…be ready :-). For the rest of this post let me (again, reasonably briefly) go through a few of the vehicle choices you have right now and some of the pros and cons of each.

Tesla Model 3: Full disclosure (or confession), we’re first-day reservation holders on a Model 3, so I’m definitely biased (and excited to get ours later this year or perhaps early next year). Tesla is the reason I can write this post. Because of their incredible work over the last decade or so, electric cars are going mainstream. While you have several good choices today, every auto maker will be coming out with compelling electric cars in the next 2-5 years because Tesla has shown that you can make a compelling car that people will want to buy (at least 400,000 people have reserved a Model 3 and put a $1000 deposit down a year in advance, including yours truly).

Up until now Tesla has been the leader, but their offerings have only been in the luxury car segment (Model S and X cost $70,000 to $150,000-ish). That was part of Elon Musk’s master plan (here’s part deux), to generate revenue to fund the development of a mass-market car. With a base price of $35,000, I would still consider a Model 3 to be on the upper end of that mass market, but certainly within the range of what many middle-class Americans pay for their cars. (We’ve never paid more than $21,000 for a car, so this is definitely a change for us.)

The Model 3 is designed not only to be a great electric car, but to be a great car, directly competing with the BMW 3-series and the Mercedes Benz C-class. (This post does compare total cost of ownership to a Camry, but mainly from an evaluating Tesla as a company perspective.) The reveal event is scheduled for July 28th, so at that point we’ll know all the details about the car and hopefully the pricing on the available options. (Once we know the pricing on the options, I will write a follow-up post on the details of our Model 3 purchase.)

The main points to know about the Model 3 at this point for comparison purposes is a $35,000 base price, at least 215 miles of range on a charge, access to Tesla’s Supercharger Network, and all the hardware included to enable fully autonomous driving in the near future should you want that (and enhanced autopilot driving right now). The other thing, unfortunately for most of you reading this, is that if you aren’t currently on the wait list, if you sign up for one today it will likely be early 2019 before you can get one. It qualifies for the $7500 federal tax credit (although if you aren’t already on the list, you will likely be in the phase-out period by the time you can get one, so might only be $3750 or $1875) as well as the $5000 Colorado tax credit.

Tesla Model 3 Net Base Price after tax incentives: $22,500

2017 Chevy Bolt: The only non-Tesla long-range fully electric car currently on the market, the $37,500 base price Chevy Bolt is a good car. It was named North American Car of the Year for 2017 as well as Motor Trend’s Car of the Year for 2017. It gets 238 miles on a charge, is a reasonably roomy hatchback, and is a pleasure to drive. To be clear, the Model 3 is anticipated to be in a different class than the Bolt. The Model 3 is targeted at the low-end luxury market, the Chevy Bolt at the “regular” market.

There are probably three main drawbacks to the Bolt right now:

  1. Chevy is constraining production, so there is somewhat limited availability (although definitely more available than the Model 3 🙂
  2. Some people feel it is a little “small”. From what I know, I don’t think so, but if you’re used to an SUV, I imagine it will feel small.
  3. The Bolt does not have the advantage of the Supercharger network. This is only an issue for long road trips. On a long road trip, the fast-charging capabilities of the Supercharger network is a huge advantage for Teslas. There are plenty of charging stations available for the Bolt, they just won’t charge as quickly as the Superchargers will. (And, of course, you can plug into any electrical outlet.) As the charging infrastructure is built out, and faster chargers are deployed, this will become less of an issue (although it’s unclear whether today’s Bolt will be able to take advantage of those faster charging speeds).

The Bolt qualifies for the $7500 Federal Tax credit and the $5000 Colorado tax credit, so the base price in Colorado is effectively $25,000 (Chevy is still a long way away from selling enough electric cars for the Federal incentive to phase out for them.)

2017 Chevy Bolt Net Base Price after tax incentives: $25,000

2017 Nissan Leaf: Next to Tesla, Nissan has had the most impact on the EV market with the Leaf. With a base price of $30,680 and a range of just over 100 miles, it’s a great car for what it was designed for. As a “daily commuter” car, it’s great, and has all the electric advantages. The main downside is total range and the fact that Nissan did not build thermal management into the battery, so the battery degrades more over time than batteries from Tesla or Chevrolet.

Everyone is eagerly anticipating the release of the next generation Leaf (2018 model year) in early September. This is expected to be in the same range category as the Model 3 and the Bolt and hopefully will be thermally managed. Nissan has kept a tight lid on the features and pricing of this car, but I would anticipate it will be in the 230 mile range on a charge and around $33,000 base price before incentives, so $20,500 in Colorado after incentives, but I could be very wrong. (Nissan is closer than Chevy to phase out, but since they don’t have 400,000 reservations like the Model 3 does, it shouldn’t be an issue if you are buying now.)

Because the next generation Leaf is on the way, however, there is a window of opportunity to get a great deal on 2017 Leafs. If you are okay with the range limitation and the battery degradation, you can get 2017 Leafs for $25,000 or less before incentives, which means around $12,500 or less after incentives in Colorado (and currently you can even get 0% financing for 60 months). That’s a pretty good deal and worth considering. As we get closer to September, you can probably even deal and save a bit more (for any that are left in inventory).

2017 Nissan Leaf Net Base Price after tax incentives: $12,500
2018 Nissan Leaf Net Base Price after tax incentives: Guessing $20,500

2017 Chevy Volt: This is a plug-in hybrid, not a pure electric vehicle, but is a great choice for many folks, especially if you aren’t quite comfortable yet going pure electric. It gets about 50 miles on pure electric, and then switches over to the gas engine to extend the range to 420 miles. Since most people’s daily driving is less than 50 miles, it functions like a pure electric vehicle most of the time, but gives you the comfort level of knowing that the gas engine will kick in if you run out of charge (and you can fill up at gas stations instead of worrying about charging).

The base price is $34,095 but, after the Federal and Colorado tax credits, that drops to $21,595. That’s a really good price for a really great car that gets you almost all of the advantages of an electric car with the safety net of a range-extending gas engine.

2017 Chevy Volt (plug-in hybrid) Net Base Price after tax incentives: $21,595

There are other choices out there (and many more coming soon), but those give you a pretty good idea of some of the options available to you. For many of you, however, you might want to consider one more option, which is buying a used electric or plug-in electric car. Again, there are lots of options, but one of the best would be to look at used Chevy Volts, particularly 2013 models with average to low mileage.

I can speak directly to this because we ended up purchasing a used 2013 Chevy Volt at the end of December. We were not really looking at getting a new (new to us at least) car, since we had the Model 3 reservation. But we have a new driver in the household and, on occasion, having a third car would be nice (first world problem). Plus, our 1995 Honda Civic, which has been a great car, was starting to experience a few issues and we were worried it might not last until we got the Model 3 (our other car is a 2006 Toyota Prius).

So we originally explored both new and used Nissan Leafs, but finally decided that with the battery degradation issue we didn’t want to go with a somewhat compromised used Leaf, and with the Model 3 coming a new Leaf wasn’t quite as compelling for us. We had decided to live with two cars and hope the Civic held out until we got the Model 3, but then we ran across some good deals on 2013 Chevy Volts that were coming off lease with relatively low mileage. As we got closer to the end of the calendar year, the deals kept getting better, so we started investigating a bit more.

Eventually we found a base model 2013 Chevy Volt with about 21,000 miles on it for only $13,500 and decided that was too good to pass up. Especially because this car came from out of state, and at that time Colorado still offered a state tax break on any EV that had not been previously licensed in Colorado. That saved us an additional $2145, bringing the net price down to $11,355. (Unfortunately, Colorado discontinued the tax break for used cars at the end of 2016). This was also a Certified Pre-Owned vehicle, meaning we got a one year warranty and two free maintenance visits over the next two years (oil change and tire rotation).

The 2013 Chevy Volts typically get between 30 and 40 electric miles on a charge, and then the gas engine extends the total range to about 380 miles. But, again, for most folks’ daily commutes, that’s plenty. To give you an idea, we’ve driven the car about 3800 miles so far and have yet to put gas in it. We’ve used a total of 3.2 gallons of gas, and about half of that is because the car will force the gas engine on periodically if you haven’t had to use it just to keep the gas engine in good shape. I anticipate not having to put gas into it for another 12 months or so (perhaps more if our Model 3 arrives sooner rather than later).

Used 2013-ish Chevy Volt Base Price (no tax incentives): Neighborhood of $14,000

Buying a used car is often a much better financial decision than buying new (current EV incentives change that equation a bit for electric vehicles right now), so this is an excellent choice to consider for those who don’t want to spend so much, or who aren’t quite comfortable buying a fully electric car yet. It will provide a nice bridge vehicle to the near future when the charging infrastructure is built out, the range of pure EVs will likely be greater, and economies of scale will likely make the prices even more competitive. (I’d predict the “tipping point” is 3 to 5 years before buying an electric car will be the obvious choice for almost everyone – sooner if a carbon tax somehow gets passed in Washington.)

If you choose to work with me, part of our discussions will be around making good financial decisions around your transportation needs, so discussing electric would certainly be part of that. But, even if you don’t want to work with me on financial stuff, I’d be happy to discuss (cajole, harangue, hassle you about) electric vehicles. They will save you time and money (especially right now with the Federal and Colorado tax incentives), help save the planet and, oh yeah, are really fun to drive.