Why do credit card companies offer reward programs?

As counterintuitive as it may sound, offering 5% cash back on goods users purchase actually increases a credit card company’s profit margins. The reasoning behind this lies within how credit card companies generate money. (Sometimes a bank or credit union issues the credit card). First, by offering an incentive to use credit cards as a form of payment over cash or checks, it increases the probability that the financial institution will be able to collect interest on any remaining balance left unpaid.

Second, by offering enticing reward options, financial institutions can depend on users to pay more often with a credit card; this leads to more interchange fees. Interchange fees are processed and transferred to the issuer as a form of revenue when a customer uses his or her credit card. By implementing an attractive rewards program, it increases spending and thus interchange fees.

Another reason why financial institutions offer rewards is to increase their market size and attract customers in new market segments that might not otherwise be inclined to use credit cards. With a multitude of different payment options available, institutions need to offer attractive options to differentiate themselves from their competitors. Also, if a good rewards program is in place, it decreases the number of users who switch to different companies and increases the chances existing users remain loyal customers. Loyal customers mean more credit card transactions being processed, and more credit card transactions mean higher interchange fee revenue.

Credit card reward programs may sound attractive to consumers; however, they are not always beneficial. Consumers need to understand the credit card interest rate, be cautious of  how much they spend, and realize their purchasing power if deciding to participate in the reward program.

Written by: Cuihua Lin, Financial Wellness Peer Educator.

Reviewed by: Kathy Sweedler, Consumer Economics Educator, University of Illinois Extension.

What kind of checking account is best for me: banks vs credit unions?

When it comes to choosing a checking account, it can be rather confusing. For example, different types of banks, offering different deals, with different fees all while requiring you to know what they’re talking about. To make things easier, let’s start with the basics: the differences between a credit union and a bank. Both of these financial institutions offer a variety of services, including a checking account, which essentially works the same way; the institution stores your money and you are able to withdraw it anytime you need. However, credit unions tend to be smaller, local and more focused on customer service while larger retail banks may be easier to become a member as well as have a wider variety of customer resources.

Let’s start by looking at credit unions, shall we? A credit union is unique in that the customers are the owners; anyone who chooses to utilize a credit union’s services can provide input into the union’s management and investment plan. These businesses are non-for-profit organizations and therefore do not work to provide an end of the year profit. However, credit unions are very selective on who may join. Often times a credit union is created to service members of a local community or business. Some, but not all, credit unions are part of the shared branching network, which means that you’re able to withdraw money from any credit union that is a member across the country! Credit unions typically have low maintenance fees for using their services, such as online banking, which is great if you’re still looking into starting that checking account! Overall, a credit union is a great option, but you may have trouble finding a credit union willing to let you bank with them. Search your local community to see if there are any in which you could join.

Next we will look into retail banks. Now there are several different types of banks, however as a college student you’re probably just focused on a personal checking account therefore you need to find a retail bank! Joining a bank is relatively simple; they have fewer limitations than credit unions and are often eager to help students. Large retail banks often have an extremely wide variety of banking options to better suit individual needs; this could include automated spending tracking or monthly rewards for spending money on certain items. However, retail banks may charge relatively high maintenance fees on your checking account for online banking or maintain a minimum account balance, which for many college students can cause a considerable dent in their monthly income. Luckily, banking with a national financial institution allows greater accessibility to your money while traveling.

Now that you know the difference between credit unions and banks, check out our Choosing a Checking Account comparison chart. Regardless of what sort of financial institution you decide to open a checking account with, be sure to check if they have a daily or monthly spending limit and think about what sort of services fit your needs the best.

 

Written by: Rachel Richardson, Financial Wellness Peer Educator.

Reviewed by: Kathy Sweedler, University of Illinois Extension-Consumer Economics Educator.

How do I lower my weekly food costs?

If you’re struggling to keep your personal food costs down, there are several ways to cut your spending while still getting the most bang for your buck.  A good way to start reducing your own personal food costs is to first track your spending on food for a period of time—week, month, etc.—and see the amount of food you spend.  Ask yourself a few questions such as how much you spend on at-home cooking and eating out?  What do you spend more on?  Do you find yourself in need of eating out more or eating at home?  Once you figure out your personal expenses and answer these questions, you can start to sort out way to minimize them.

There are quite a few ways you can cut your costs on food such as:

  • Going out to eat less. According to The Huffington Post, the third largest way students waste their money is by eating out too much. If you cut back on your expenditures while you eat out or become more aware of the prices of food you are eating that is a large point of spending for many people.
  • Cooking with a friend. If you are eating meals with more than one person it is typically more economical to cook food, reducing the cost per head for food.  If you live with roommates, shop together and buy certain items together that you know you would not finish on your own which can also reduce food waste.
  • Utilizing sales and coupons. Saving a few cents on several items can quickly add up and give you more money to spend elsewhere.
  • Buying staple items in bulk. Many non-perishables can be bought in bulk at cheaper prices thus reducing your average costs on them and resulting in you visiting the store less often.
  • Shopping at cheaper retailers. This can give you the opportunity to buy most traditional items for a cheaper price.
  • Freezing fresh produce. This can extend how long fresh produce lasts and can reduce food waste in general.

If you take small steps in your day-to-day life it is very possible to reduce your food costs resulting in an overall reduction in your expenses.  Good luck!

Written by Libby Cocagne, Financial Wellness for College Students Peer Educator, University of Illinois Extension.

Reviewed by Kathy Sweedler, Consumer Economics Educator, University of Illinois Extension.

What is the Difference between a Credit Score and a Credit Report?

Many people use the term credit score and credit report interchangeably. Although mistaking them may seem harmless, credit scores and credit reports are very different. As stated in the name, your credit score is exactly that, a score. This score is a numerical value that is calculated and used by lenders to determine the risk associated with giving a borrower a loan.

The formula most often used to calculate a credit score takes into account a person’s payment history, amount owed, length of credit history, new credit and type of credit used. A person may receive a different credit score from each lender or reporting agency because the formula used to calculate the credit score will vary. The reason for the variance is because there are different types of credit score scoring models such as FICO, the most commonly used right now, and VantageScore, which both lenders and consumers are starting to use more often.

On the other hand, a credit report is a report of a person’s credit history. A credit report will include information such as a person’s social security number, current and previous addresses, and employment history. Besides this, a person can find a list of their lines of credit such as credit cards, student loans and mortgages, the date each one was opened, credit limits, and whether their accounts are past due or in good standing. Bankruptcies will also appear on someone’s credit report as well as the names of companies that have recently asked to see the person’s credit report.

Overall, it is also important to check your credit score in order to know where you stand, credit wise, and to be prepared for any outcomes on your credit applications. It is also important to remember to check your credit report to catch identity theft. A person should also check the credit reports from all three credit bureaus to ensure that all three credit bureaus have accurate information. As stated earlier, a credit score and a credit report are not the same thing, but they are closely related. The reason for this is because the information on a credit report is used in the calculation of a credit score.

Written by: Lesly Luna, Financial Wellness Peer Educator, University of Illinois Extension, 2017.

Reviewed by: Kathy Sweedler, Consumer Economics Educator, University of Illinois Extension, 2017.

How can I successfully achieve my goals?

Creating a savings goal is commonly confused with creating a dream. For example, when people are asked to create a savings goal for a vacation trip or a car, their response is “I want to go to [location]” and “I want to have a [car model]”. This only represents what the individuals want (a dream) without creating a reasonable process (savings goal) to achieve this end product.

That being said, we peer educators at the Financial Wellness for College Students program advocate S.M.A.R.T. Goals. When creating a savings goal, it is important that you incorporate all five of these components: Specific, Measurable, Agreed Upon, Realistic, and Timely.

Specific: Make your goal well defined so that it can be clear to anyone who has a basic knowledge of your project.

Measurable: Create an easy way to keep track of your goals that allow it to be motivational to achieve.

Agreed Upon: In cases when your goal involves others, collaborate and make sure that everyone acknowledges the goal.

Realistic: This allows your goal to be results-oriented and a reasonable-seeming accomplishment.

Timely: Create a timeline when this goal will be achieved. Being able to track your progress encourages you to continue and see that the effort is effective.

Download a handy form to write your own S.M.A.R.T. goals.

Written by: Rex Wang, Financial Wellness Peer Educator, University of Illinois Extension, 2017.

Reviewed by: Kathy Sweedler, Consumer Economics Educator, University of Illinois Extension, 2017.