Secured Credit Card pays 6%?

[thd7t]

I just read an article about secured credit cards that pay interest to the user if they do not carry a balance.  The cards are ostensibly for people with poor credit.  You have to keep money in an account to cover your spending.  It theoretically allows one to build credit. 

It seems like a good way to keep a liquid emergency fund without squandering all of your returns.  In fact, with 6% interest, it looks like a pretty good diversification technique (as risk is low).  Obviously, the yearly fee on the card is going to eat up some of your return, but probably less than 1% if you have $5000 in the account.  Right now, my online savings account is paying around 1%, which is frustrating, but I appreciate having liquid funds available.  I'm not a credit card user, but I have a long credit history and excellent credit.  Can I hear some downsides to this or alternatives?

http://lifehacker.com/get-the-best-interest-on-your-savings-by-using-a-secure-1603106805/all

[Lis]

It's definitely an interesting concept and seems like a good place to keep a small emergency fund. There's something sketchy about this though... I'd definitely feel the need to go over the fine print very very carefully. This might fall into the category of if it's too good to be true, it probably is.

[gimp]

I agree with Lis. It's a really good idea. But 6% sounds too good to be true.

The optimist would say that 6% is the real deal, but: nobody with poor credit has enough money for that 6% to be useful. Assuming the average person with a secured CC carries a positive balance of $300, that's $18 a year, versus say $60 in fees ($5x12).

The pessimist in me would assume some fine print: interest starts getting charged on the date of purchase, not only on unpaid monthly balances; and that the rate is high; and that the 6% is only on positive balance greater than current outstanding balance (ie, if you have $300 but $175 in purchases at the end of the billing cycle, you only get it on $125 for that cycle); and that there are other fines often found on financial vehicles of any sort intended for people with bad credit. The further pessimist would also assume that there is a per-transaction fee, including deposits (even direct deposit) and balance inquiries, and also that there is a maximum daily purchase/withdrawal. Because all of those things can be found on the exploit-the-poor cards that walmart loves and occasionally pays its employees with. (Scrip, anyone?)

At best, though, 6% on $5k is $300, and if fees are $60, that still leaves 4.8%. Pretty good for nice, liquid cash. Less good for less liquid cash (if they have maximum daily withdrawal/purchase.)

[Cyrano]

Typically, these are loaded with fees, monthly fees, deposit fees, withdrawal fees, activity fees, inactivity fees, ATM fees, customer service fees, fees for asking about the fees....

The 6% quoted is likely regarding Mango Money, which is among the least abusive of the bunch. If you direct deposit into the savings account, and avoid fees other than monthly fee, is possible to get something like 5% on $5000 with them.

Personally, I'd rather spend my "gaming the system" effort on reward checking accounts with higher balance caps.

[thd7t]

Thanks everyone for good answers.  It's not something I'm looking at, right now, but my wife and I like a 3-6 month emergency/opportunity fund.  We keep it in an online savings account, but 1% interest is just depressing.  Just wanted some other views on this.

[nordlead]

I looked into Mango once. It is too much of a hassle to be worth it even for the 6%. Hard to get the money out, and I believe some people actually lost their money (dispute with Mango, don't know if they got it resolved).

Honestly, a 1%/year loss on an EF (1% interest on 2% inflation) is a small price to pay if it helps you sleep at night, and there are ways to break even on the EF. On a $30k EF, I can make up that 1% ($300) by opening two Chase savings accounts with $175 bonuses for depositing $15k in new money and then throwing it back into your high interest savings account. Or, I can just go the simple way with longer term CD's or iBonds.

[RyanHesson]

There were two I looked at. One was Mango, the other I fogot the name of. Mango paid 6% I think, the other paid slightly below (5.95%?)

Anyway, they're both garbage.

For Mango, it's practically impossible to get money out, and the 6% maxes out at 5K, and you need to have direct deposit, and there's a monthly fee (was it $6/month).

The other one had a limit of 1K and was equally impossible to get money out. Didn't require direct deposit, but had an $8/month fee.

Don't waste your time with these. They're garbage.

[frugaliknowit]

Rewards checking accounts are more workable for larger amounts ($20K or so) if you are willing to jump through hoops (debit card purchases, e-statements, payroll credits, etc.).  As another mustachian mentioned, each June Chase offers rewards for opening new savings accounts for a minimum of 6 months which can be used as a yield booster.  With these alternatives there are no fees involved, assuming you don't overdraw or do something careless.