Credit Card Debt Management

Well, we speculated that the credit card industry might be sinking, or at least receding, and that card companies may need to cut back on customer rewards. Guess what — it’s happening.

A recent Newsweek article how American Express and Citibank have cut back their rewards. Specifically, that means no more 5 percent and double-cashback rewards for cardholders who buy groceries and gas. It’s a fine time to yank that reward, given that consumers are increasingly buying only commodities like groceries and gas instead of luxury splurge items. Cardholders trying to navigate the murky waters of credit card rewards nowadays are going to find the ride much bumpier and will probably meet with much more resistance.

One of the cards getting chopped is the Citi Dividend MasterCard, from 5 percent on everyday purchases to only 2 percent (though it’s adding utilities and convenience stores to the list of everyday purchases). HSBC’s Direct Rewards MasterCard is still offering a 5 percent rebate at gas pumps, grocery stores and drugstores, though it is also a potential candidate for a cutback in the future.

The key to making credit card rewards work for you in tough economic times is to go for cashback rewards. Everybody needs a little cash every now and then, right? However, really consider whether it’s wise to put all your gas or groceries on the card just to rack up a relatively paltry cash reward and put yourself at risk for interest charges.

Essentially, by charging “everyday purchases,” you could be flirting with disaster. Is it possible that you might have $150 cash available for gas this week, but choose to use the card instead for its rewards benefit. Then, when the bill comes due, you don’t have that cash to pay it in full (unless you’ve been a savvy saver). By not paying in full, you subject yourself to interest charges that could well exceed any “cashback rewards” you may have earned.

Furthermore, you may not even see the cash rewards for a while, because some companies require it to accumulate to a certain amount. So bottom line, think about it. While these cash rewards are touted by marketing gurus as “discounts” on gas, groceries and utilities, the ultimate discount may just be to go ahead and pay cash to prevent any possible interest charges.

The world’s first independent credit card company, established in 1950, is changing hands. Owned by Citigroup since 1981, the sell of Diners Club international network and franchisor brand to Discover Financial for $165 million was approved this month. This was cash money, a serious investment that belies how badly Discover wants to expand its payment network around the globe.

According to Banking Times, the sell was designed to “cut costs and increase efficiency,” as Citigroup was pretty banged up by bad debt, including that acquired in the subprime mortgage fallout. Citigroup’s profits for 2007 were down more than 50%, and 2008 isn’t projected to be much better.

According to the article, this acquisition is expected to be a big boost to the ailing Discover Financial:

“Diners Club is accepted at more than 8 million locations in 185 countries and Discover expects the purchase to improve its presence among business travellers, particularly outside the North American market. The transaction should add between $10 million and $15 million to the group’s annual pre-tax profit.”

Other finer points include the fact that Citigroup will retain ownership of 13 Diners licensee territories (roughly 30 percent of the total), including USA, Canada, Europe and Japan. It’s interesting that MasterCard was co-branded on Diners Club cards since 2004, a partnership that is expected to continue in the territories controlled by Citigroup. Discover’s acquisition — which gets it into the commercial market for the first time with more than 80,000 such credit cards — totals $30 billion in charge volume. Everything is expected to be finalized within 60 days.

Virtual credit cards are certainly nothing new in the world of online shopping. After all, they’ve been around almost seven years, but they may not have received due attention in the past. Also known as substitute credit card numbers or controlled payment numbers, this technology offers online shoppers a free and highly effective layer of protection against identity theft.

According to the Sound Money Tips blog, MBNA, Citibank, Discover and Paypal all offer this free service to customers. All you have to do is sign up, download the software, and enter your credit card info (viewable only to the customer and the bank).

Some services limit spending to one merchant or venue only. Other services do not place restrictions on spending, but do generate a different “temporary number” with each online purchase. This temporary number is the only thing hackers can see, whether they eavesdrop at the point of purchase or hack into merchant records after the fact.

Many consumers have snubbed virtual credit cards because they are viewed as unnecessary in light of the fact that credit card companies generally do not hold customers liable for fraudulent purchases. However, the bigger picture is that online credit card fraud can turn into a bigger case of grand-scale identity theft, from which it takes a lot of time and money to recover. And who really wants to deal with that?