This is not a sponsored post. American Express or anyone else doesn’t pay me anything if you apply. I’m just passing along the deal.

I knew about this card for some time. I didn’t apply until now because of its $45 annual fee (waived in the first year). Now the signup bonus will cover the annual fee for the next 10-15 years.

Purchases on the SPG AmEx card earn one SPG point per dollar spent. Again, at a value of $0.02 per SPG point, it’s at least as good as the Schwab Visa card (no longer accepting new applications).

Given that you can get a Fidelity AmEx card any day with 2% cashback and no annual fee, the SPG points you earn have to be worth more than $0.02 per point to make the SPG AmEx card worthwhile. At the  price point I usually spend on a hotel room, Starwood’s Category 2 hotels are a very good value for 3,000-4,000 points a night. If I were to pay for a room in cash, I’d have to pay about $100 a night including all taxes. That makes a SPG point worth 2.5 to 3.5 cents.  Instead of getting a 2% reward in cash, I’ll get a 2.5%-3.5% reward in hotel points.

Hotel points are much easier to use than airline miles – it seems airlines never let me use miles on the dates I want. However, I never had any problem with finding a room when I wanted to redeem hotel points. SPG specifically advertises no blackout dates.

Unlike booking through Priceline or Hotwire, you can cancel a hotel room booked with SPG points, usually up to the date of arrival or the previous day. You also know for sure which hotel you will be staying at, versus taking a chance with having a bad one assigned to you by Priceline or Hotwire.

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The biggest difference is that Alliant pays 1.5% interest on the checking account balance versus others paying near zero. There are no minimum balance, no interest rate tiers or cap, and no debit card usage requirement. To get the 1.5% rate, you only have to get paperless statements and have one electronic deposit a month (ATM, direct deposit, or transfer from another account).

As I mentioned in the previous post, anyone can join Alliant Credit Union by joining a PTA or by donating $10 to Orphan Foundation of America. Alliant doesn’t pay me in any way if you join.

Although Alliant doesn’t reimburse ATM surcharges, there are many free ATMs around me — all ATMs at US Bank branches are free; so is the ATM near the cafeteria at work. Some of those free ATMs can take deposits even though they are run by someone else. It’s quite amazing to be able to deposit a check at a different bank’s ATM and have it show up in the credit union’s account instantly. It makes Alliant Credit Union feel more local.

While doing the setup for the checking account, I also learned why a credit union isn’t for everyone. Having used some mega banks in the past, I see banks do many things better than a credit union. Whether you care about those things is a different matter. I already mentioned a few small things in the previous post. Here are a few more.

Vague Email

Look at this odd email Alliant Credit Union sent to me:

From: skybranch@alliantcreditunion.com
To: customer@example.com
Subject: Add Payee Notification

This e-mail was generated to notify you that your ACH account has added a new Payee.

That’s the whole email; I only left out a confidentiality notice footer. Can you tell what the email is trying to say? I have a checking account and a savings account, what exactly is my ACH account and why did it decide to add a new Payee? Who is this new Payee? Alliant Credit Union’s domain is alliantcreditunion.org. How come the from-address is alliantcreditunion.com? Is it real or phishing?

If you guessed the email was triggered because I added a payee in online bill pay, you’d be wrong. Try again.

Debit Card Activation Asks for SSN and Date of Birth

I received a debit card in the mail. When I called the toll-free number on the sticker to activate it, I was asked to punch in the full debit card number, my Social Security Number and date of birth. I’m not sure if the activation toll-free number is operated by the credit union itself or a vendor. If it’s operated by a vendor, did the credit union give out my SSN and date of birth to the vendor?

I did call from my home phone. For cards issued by some other banks, I only had to enter the last four digits of the card number and the activation system used caller ID to validate against my home phone number on file. It was faster and more secure.

Frequent Security Challenges

When I log in to online banking, more than half of the time I’m challenged to answer a secret question. It doesn’t matter if I’m logging in from the same computer with the same IP address. After a while, it gets annoying. I also wonder if the frequent challenges will make the secret questions less effective. The more often I answer them, the more opportunities for criminals to intercept my answers.

Online Bill Payment Always Shows Payment by Check First

When I add a payee to Alliant’s online bill pay, it always shows it will be paid by check. It doesn’t show when it will be delivered. There’s no online directory to search for known billers for electronic payments. I learned from FatWallet forum that the system will update the payment method (electronic transfer or paper check) only after it makes the first payment. Until then, you have to schedule more lead time and assume it will be paid by a paper check.

You see providing a checking account is more complicated than doing a savings account or CD. I don’t know if Alliant Credit Union is typical among credit unions. Being one of the largest, it should be better than average. There are still rooms for improvement in many areas. That’s why a credit union isn’t for everyone.

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I have two comments. The first one is:

Why should a checking account be free?

A checking account is a service provided by the banks. The service costs money to produce. There’s no reason it must be given out for free.

Free checking has been subsidized by overdraft fees. People on tight budget or those who don’t watch their balance carefully pay a much bigger share of the cost than others. That’s not fair, is it? The cost should be shared more equally among all customers. If that means there has to be a monthly fee, so be it.

My second comment is:

A checking account wants to be free.

That of course is a parallel to a famous declaration about information. While there might be an end to checking accounts absolutely free of any strings, I don’t see how the vast majority of customers will ever pay a monthly maintenance fee for their checking account.

The reason? Competition. A checking account is a commodity. There are more than 8,000 banks plus over 7,000 credit unions in this country. Someone, somewhere, will offer a free checking account for customers who refuse to pay a monthly fee. The incumbent banks know it. Therefore they will offer a way to make their checking account free: keep a minimum balance, open a savings account or CD, use online bill pay, use the debit card, get paperless statements, etc., etc.

When all is said and done, there will still be free checking. Don’t worry; it will not end.

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The financial reform bill being considered in the Senate is S. 3217 Restoring American Financial Stability Act of 2010. The amendment that the newspaper referred to is S.Amdt. 3812, sponsored by Senators Tom Harkin (D-Iowa), Charles Schumer (D-New York), Bernard Sanders (I-Vermont), and Tom Udall (D-New Mexico). The meat of the amendment says:

(D) REGULATION OF FEES.–The regulations prescribed under paragraph (1)shall require any fee charged by an automated teller machine operator for a transaction conducted at that automated teller machine to bear a reasonable relation to the cost of processing the transaction, and in no case shall any such fee exceed $0.50.

I find this proposal very interesting. I see our Senators are very concerned about consumers paying high ATM fees. The prevailing ATM fee has crept to $3 per withdrawal.

I don’t like ATM fees although I’ve paid the fee many times without hesitation. My bank reimburses me all ATM fees, but I’m sure I’m compensating them in other ways which end up paying the ATM fees. If the ATM fees are capped, I will pay less.

Time Magazine’s It’s Your Money blog reported that credit unions are against this. I’m confused. I thought the credit unions are the good guys. They are in this price gouging game too?

On the other hand, are ATM fees of such importance that requires legislation? How about requiring all banks to pay interest on deposit at a minimum rate of the prime rate minus 2%? Or capping the interest rate on car loans at 5-year Treasury yield plus 3%? That’ll put far more money in the consumers’ pockets than capping the ATM fee.

The fundamental issue comes down to regulating prices. The ATM fee is a price for a product or service. Who should set the price for this product or service? If the price for a product or service is too high, how bad is it if the consumer simply refuses to buy that product or service? If they accepted the price by pressing Yes, is there a problem?

The ATM fee is the most transparent bank fee. Everybody knows about it. If you don’t know beforehand, the machine shows the fee and asks you if you are OK with the fee. If you don’t want to pay the fee, press No or Cancel. How is it different from anything else that has a price tag?

If a high profit margin is the problem, I can think of some other overpriced products that badly require Congressional intervention:

Jewelry – Too expensive. No practical use. Too much profit made by the stores and the industry.

iPad – So many people want them. The price does not "bear a reasonable relation to the cost."

First Class air ticket – Same plane, just a larger seat and maybe a meal. No reasonable relation to cost.

Soft drink at sporting events – $4? Are you kidding me? That’s higher than the ATM fee!

I’m sure you have your list of overpriced items too. Tell your Senators about them. Make democracy work.

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Last week, the regulators closed R-G Premier Bank of Puerto Rico together with two other banks in Puerto Rico, Westernbank and Eurobank. Before they were closed, all three banks consistently offered the highest yield on brokered CDs at Vanguard, E*Trade and other brokers who get their brokered CD listings from BondDesk Group.

I bought the R-G Premier CD on the secondary market through Fidelity. I knew it was a weak bank when I bought the CD. So I made sure that I paid below the face value. Its failure actually would give a small boost to my expected yield.

Fidelity hasn’t yet credited my account with the full face value plus accrued interest through the date of the closure, but I’m not too worried. I expect the credit in the next week or so.

With the small discount at the time of purchase and the interest I already received, my return over the six months holding period would be about 3.0% annualized when the face value is finally credited to me. Not bad for a six-month CD. However, if I reinvest the payout into a new CD, the rate is somewhat lower now.

After the failure of those three banks in Puerto Rico, Puerto Rican banks continue to offer the highest yield on brokered CDs through BondDesk. The table below shows the top 1-, 2-, 3-, and 5-year new-issue brokered CDs at Fidelity, Schwab, and Vanguard as of yesterday. The star ratings are from BauerFinancial.

Is it worth it to squeeze out up to 0.3% a year buying CDs from a weaker bank in Puerto Rico, especially from a 0-star bank? You will have to be comfortable with the answer yourself. If you know what you are getting into and you don’t mind a surprise early payout, it’s fine. The CDs are still FDIC insured. If you dislike hassle, I wouldn’t recommend it.

Unless you absolutely have to hold CDs in a brokerage account, brokered CDs aren’t that great to begin with, let alone from a weak bank. Retail CDs bought directly from a bank or credit union usually have a higher yield and a low cost early-withdrawal option.

For a more complete write-up on short-term fixed income instruments – Treasuries, bond funds, bond ETFs, direct, brokered, and secondary CDs, please read my previous post Short-Term Fixed Income: CDs vs Bond Funds.

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MSNBC.com columnist Bob Sullivan wrote a book Stop Getting Ripped Off: Why Consumers Get Screwed, and How You Can Always Get a Fair Deal. It was published around Christmas time last year. He spent five pages in the book trying to explain how credit card companies use the average daily balance method to calculate interest and how that method maximizes the revenue for the bank.

With the help of a spreadsheet created by blogger NCN at No Credit Needed, Sullivan showed that when a consumer doesn’t have a grace period because he’s carrying a balance, if he charged $3,000 on the 5th of the month (assuming the billing cycle runs from the 1st to the 30th), he would owe five times more interest than if he charged the same $3,000 on the 25th of the month. The author announced the surprise discovery:

"Putting off big-ticket purchases for twenty days can cut your interest charges by 80 percent!" [p. 85]

With that insight, our consumer advocate came up with a strategy: pay early, buy later.

Sullivan thinks there’s something unfair there — that the credit card companies use the average daily balance method to rip off consumers. After all, the title of the book is Stop Getting Ripped Off.

"Banks hire mathematicians to spend a lot of time trying to cook up formulas that are extremely advantageous to the banks." [p. 84]

"Spreading interest-rate charges over the maximum amount of days is a clever way to increase revenue." [p. 89]

I find it amazing how such a simple matter can get so convoluted. The whole exercise through the spreadsheet and all just showed he didn’t quite get how interest is supposed to work.

The basic principle for lending and borrowing is really simple:

If you use other people’s money, you pay interest.

In this basic form, it’s very easy to understand and I think everybody would agree that’s the way it should be. If you borrow money, you pay interest. If you borrow more money, you pay more interest. If you borrow the same amount of money for longer time, you pay more interest. If the amount and time are the same but the interest rate is higher, you pay more interest.

After you understand the basic principle, why is it any surprise that interest on a charge made on the 5th would be five times more than the same charged on the 25th? The charge on the 5th is borrowed for 25 days while the charge on the 25th is borrowed for 5 days. 25 days is five times of 5 days. Q.E.D.

I have a mathematical proof showing that calculating the interest by the amount borrowed times the number of days borrowed is exactly the same as applying the daily rate to the average daily balance for the month. In other words, the average daily balance method is consistent with the basic principle of lending and borrowing.

For the math inclined, let Ci be a charge and Di be the number of days borrowed. Let r be the daily interest rate and M be the number of days in a month. The interest for the month should be:

   SUM(Ci * Di * r)
= (SUM(Ci * Di) / M) * M * r
= Average Daily Balance * M * r

There is nothing unfair about the average daily balance method. Once one understands the basic principle of lending and borrowing, "pay early buy later" becomes so obvious — you don’t pay interest if you stop using other people’s money.

The average daily balance method isn’t the problem. Carrying a balance is. Don’t carry a balance. Enough said.

[Links to Amazon.com are affiliate links. Amazon pays me 4% - 6.5% if you make a purchase within 24 hours.]

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I have a good explanation for that and it’s not because banks are cheating customers.

Before we continue, let’s take a look at how Konczal got the $500 a year number. He first gave this formula:

Value = Fees + 2.5% * (savings + checking) + 1.7% * (debit card transactions)

He then gave an example of a hypothetical family who makes $60,000 a year, holds $10,500 in checking and savings accounts with the bank, charges $1,155 a month on debit card, and avoids all bank fees.

$0 + 2.5% * $10,500 + 1.7% * $1,155 * 12 = $498.12

After arriving at the roughly $500/year number, Konczal asked rhetorically “do you get that much quality from your bank?”

My answer is, yes, you do. Let me explain why the bank should make that $500.

For the sake of this exercise I will accept that both the formula and the hypothetical are completely accurate and representative.

It’s not a secret that one can make purchases on a credit card, pay the bill in full, and earn rewards from the purchases. The standard cash rebate rate is 1%; better cards pay more than that. This family must know about it and they still choose to use their debit card. I can think of several good reasons:

(1) They carry a balance on their credit cards. Forgoing the reward is better than paying interest.

(2) They like to keep track of their spending. Debit card purchases generate a record trail; cash spending is hard to account for. The fees the bank charges the retailers cover the bookkeeping service and the elimination of cash handling cost for the retailers – counting, shrinkage, armored truck, etc.

(3) They don’t want to be enticed into overspending. With their debit card, they only spend the money they have in their account. Using a debit card helps them spend less and save more.

In each case letting the bank earn the fee from debit card transactions must be totally worth it to this family; otherwise they wouldn’t use their debit card because they can easily get $140 a year from using a credit card and paying the bill in full every month.

We now turn our attention to the money in their checking and savings accounts.

It’s true the bank loans their money out to other customers at a higher rate. However, the bank earns the higher rate by taking credit risks and locking up liquidity.

By now we know that not all customers pay back their loans. So many banks failed because of customer defaults. Risky money earns a higher rate than safe money.

Those loans – car loans, home equity loans, small business loans, and so on — also have longer terms than checking and savings accounts. Long term money earns a higher rate than short-term money. Our family understands that for sure.

If this family becomes angry about the bank earning a higher rate on their money, they can bypass the bank and do the same thing the bank does: taking risks and locking up liquidity. 10-year Treasury is paying close to 4% now. Making a safe, long-term loan to the US government will deny the 2.5% the bank earns from the family. If the family wants to take risks, there are all sorts of bonds and bond mutual funds. They can also send their money to P2P lending sites and play banker. I don’t recommend it but I have those referral links too.

Given ample opportunities to earn the extra 2.5% by taking risks and/or locking up their money for longer term, this family still chooses to keep their money in their checking and savings accounts. They rationally pass those opportunities to their bank. Good for them.

So, what’s the fuss about the bank making $500 a year off this family? The bank makes $500 a year so our family can avoid risk, maintain liquidity, avoid paying interest, have records of their expenses, and keep their spending within budget. That’s why.

[I don't work for a bank. Hat tip to Austin for sending me the story.]

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ACH transfers take longer at some places than others. When I transfer money from Fidelity to my checking account, I see the money the next day. When I do the same from Vanguard, it takes two days. When I do it from E*Trade, it sometimes takes three days. Why is that?

ACH supports both credits and debits. You can ask one institution to move money to another institution (credit, or "push") or you can ask it to get money from another institution (debit, or "pull").

Whether it’s an ACH credit or an ACH debit, the institution at which you request the ACH transfer always takes the lead. It’s called the Originating Depository Financial Institution (ODFI). The institution on the other end is called the Receiving Depository Financial Institution (RDFI). Originating and receiving refer to the ACH transfer request, not where the money comes from or flows to. Whomever you ask to do the ACH is the ODFI.

The ODFI is responsible for making sure they have the authorization to credit or debit the other account. That’s why sometimes you are asked to fill out a form and send in a voided check. The RDFI is required to credit or debit the account on the date the ODFI specifies. Therefore if ACH takes longer at one place than another, the delay is almost always caused by the ODFI, not caused by "the system" or the receiving end.

If the ODFI cooperates, ACH should be a next-day process. You request the transfer today before a cutoff time. The ODFI sends the request to the ACH network in the evening. The RDFI shows it in your account the next morning. That’s how it works if you initiate an ACH transfer at Fidelity or WellsTrade. Everybody else should also be able to do it in one day if they really want to.

Why does it take two days, three days, or even longer at some places? It could be because they use a third party service provider. The third party does the debit first. It makes sure it gets paid the next day before it sends the credit. It takes at least two days in such scheme. Or it could be because the ODFI doesn’t send the request on the same day you request the transfer. They hold your request for extra days.

There are several reasons they hold your request. First, for risk management. If during that hold period you discover an unauthorized transfer request and you notify them, the money hasn’t really left yet. Second, for charging a premium on faster service. A bank may offer a slow ACH for free but charge extra for next-day ACH.

If you like faster transfers, use a more efficient bank or broker. Don’t let them get away with "2-4 days is the standard." The standard ACH service is next-day.

Reference: ACH 102: Who We Are and What We Do, a presentation by Nancy Grant, Senior Director of Research & Standards at NACHA.

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Both cards are issued by FIA Card Services, a subsidiary of Bank of America. The Schwab card pays 2% cash back to a Schwab brokerage account. The Fidelity Visa card pays 2% cash back only after you spend $15,000 in a year (1.5% cash back for the first $15,000). Fidelity also has a 2% cash back card — Fidelity Rewards American Express Card — which is also issued by FIA. More merchants accept Visa than American Express cards.

2% cash back is on everything. No tiers. No special categories. It can’t be any simpler. You also get ShopSafe, the one-time credit card number generator. ShopSafe is not available for the Fidelity American Express card.

FIA offers Bill Pay Choice. This card can be used to pay mortgage and bills from credit cards issued by other banks except Bank of America. You don’t earn cash back for Bill Pay Choice charges. You do get float and bill consolidation.

Automatic debit to a bank account for the full statement balance requires a phone call to customer service for a paper enrollment form. Once it’s set up, it works perfectly. No late fees, guaranteed.

Cash rebates are automatically deposited to a linked Schwab brokerage account every month. No manual request is required. There are no minimum balance or minimum activities requirements for the Schwab brokerage account. You can link a bank account to the Schwab brokerage account and transfer the rebate money to the linked bank account after the rebate is paid.

Schwab Invest First Visa credit card wins the TFB Award 2009 for Best General Purpose Credit Card. Fidelity Rewards American Express Card comes to a close second. Wider merchant acceptance, automatic rebate deposit, and one-time card numbers put the Schwab Visa card ahead.

There is speculation that Schwab may lower the cash back but they may grandfather existing cardholders. If that’s true and you’d like to get in before they change the program, act fast.

To apply for Schwab Visa, use online application or call 866-724-9223. Some applications require a phone interview. For Fidelity American Express, apply online or call 866-598-4971.

FIA, Schwab, or Fidelity don’t pay me in any way if you apply for a card.

Elsewhere on the Internet:

• FatWallet thread on Schwab card
• FatWallet thread on Fidelity AmEx card

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Double-Cycle Billing Persists, Legal or Not

It’s another "banks are out there to get you" article. It alleges that some banks are exploiting a loophole in the Credit Card Accountability Responsibility and Disclosure Act of 2009 ("CARD Act") for double-cycle billing.

I’m sorry to say that the journalist was misled by her sources. Whoever fed her the story either lack basic understanding of how loans and interest work or they understand it but choose to ignore it.

The basic rule for loans and interest is if you use someone else’s money, you pay interest. The amount of the interest depends on the amount borrowed, the time in possession, and the interest rate. The reverse works when you deposit money into a bank. If they use your money, they pay you interest. I think everybody would agree to this as the basic principle of lending and borrowing.

When there are exceptions to this basic rule, the exceptions are granted by the lender out of other business considerations. The basic rule still applies. A borrower pays interest to the lender, for the amount and time borrowed.

At issue in the SmartMoney article are Macy’s and Bloomingdale’s credit cards issued by Citibank. These cards don’t have a grace period. Interest accrues from day one. The bank gives one exception to this rule: interest paid will be credited back if the borrower pays the principal and interest in full by the payment due date.

Let me put this in a picture. For simplicity’s sake, let’s assume:

• A month is always 30 days.
• Payment due date is 21 days after the end of the month.
• The interest rate is 1.5% per month, or 0.05% per day.

Suppose a consumer charges $500 on Day 1 on a brand-new card. No additional charges are made during the month. On Day 30, when the bank issues the billing statement, the amount borrowed is $500. The payment due date is Day 51. By that time, the consumer will have borrowed $500 for 50 days. The interest will be $500 * 0.05% * 50 = $12.50. Therefore the payoff amount is $500 + $12.50 = $512.50.

If the consumer pays $512.50 on or before Day 51, the bank credits back $12.50. If the consumer pays any less, the bank does not credit anything back.

I fail to see how this arrangement is unfair to the consumer. The bank said up front the card will accrue interest for each day the money is borrowed, to which the bank is fully entitled. The bank also created an exception to give an incentive to the consumer for behavior the bank desires: pay the bill in full by the due date. The bank didn’t have to create that exception. It did because it wants its customers to pay it back in full.

The SmartMoney article says if the consumer makes a partial payment, this arrangement is equivalent to double-cycle billing, which will be illegal under the CARD Act. Let’s look at the picture again. Suppose the consumer pays $412.50 instead of $512.50 on Day 51:

From the $412.50 payment, $12.50 will be applied toward interest for $500 borrowed for 50 days. $400 will be applied toward principal balance. $100 is still outstanding, accruing interest from Day 51 onward. The bank does not credit anything back.

I still don’t see anything wrong in this scenario. The basic rule for loan and interest is satisfied: pay interest for amount and time borrowed. The consumer doesn’t get an extra credit back from the bank because the consumer didn’t take up the bank’s offer (pay in full).

To be honest I’m very annoyed by these consumer advocates. They complain about the consumer having to pay interest on the $400 but they ignore the fact that the consumer indeed borrowed that $400 for 50 days. I trust they have good intentions but it seems they don’t understand the basic rule for loans and interest.

These consumer advocates are looking at the bark through a magnifying glass. They miss the forest and they miss the tree. As a result, they are advocating for the wrong thing. The issue is moot if the consumer didn’t finance their purchase at Macy’s or Bloomingdale’s. If they pay for the purchase with their own money, they won’t pay interest. Everybody should understand this simple fact.

To take it one step further, not buying whatever they bought at Macy’s or Bloomingdale’s will save the consumer a lot more than the $10 interest the bank allegedly took through a legal loophole.

I don’t work for Macy’s, Bloomingdale’s, or Citibank.

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