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Credit cards with benefits

by The Accumulator on November 27, 2012

Would you say ‘No’, if a complete stranger handed you £200 a year with no strings attached? How about £100? £50?

That’s why I use credit cards. The right ones insist on giving me free money for the privilege of sitting in my wallet and funding purchases that I’m going to make anyway.

By smartly slaloming through the system, you can pick up special offers and free coins like Super Mario gobbling power-ups, and so earn a bit extra every year.

As long as you can follow the credit card house rules (see below) you merely need to choose the right tool for the job.

A credit card for every occasion

Whatever kind of credit card you’re after, it’s out there. Of course, we don’t want the loan advancing, wage-slavery inducing variety.

Here is a quick guide to the savvier weapons of choice:

Cashback cards
A small percentage of your spending is returned to you every year in cash. You should accept no less than 0.5% cashback and can earn up to 5% with a bit of extra effort. A 1% cashback rate would earn you £100, if you spend £10,000 that year.

Reward scheme cards
The same deal as cashback credit cards, but your pounds equal points and points mean prizes. Prizes like free flights, shopping vouchers and so on. Compare reward schemes versus cashback cards to see which is more worthwhile.

0% spending cards
Credit cards can fund a cheeky little saving scheme known as stoozing. You spend as usual but on a card that offers 0% interest on new purchases. Make the minimum repayments on the card every month and save your accumulating cash in the best instant access savings account. Just before the 0% period expires, use the money saved to pay off the debt. The interest earned equals your profit.

Overseas spending cards
Spend abroad on commission-free credit cards to get the best exchange rates possible. It’s a lot easier than wandering around with a money-belt stuffed full of local currency – the international expression for “mug me”.

Special offer cards
Here some glittering freebie dangles like bait to hook you onto an otherwise uncompetitive card. Take the bait, do the bare minimum to bag the bonus, then ditch the card like Jerry mouse eluding the ponderous Tom again.

A few house rules on credit cards

Credit cards are great as long as you follow the rules.

The number one rule is do not get into debt. If you run up a debt on a 0% card, for example, it should be matched by savings elsewhere. This way you remain debt neutral, since your savings offset your liability.

Do not fall into the credit card debt trap! Lenders hope that by giving you this ‘free’ money, you will eventually get sloppy, skip payments, and become another debt sucker. Don’t risk credit cards unless you’re as anally retentive about avoiding debt as a German politician in Athens.

Decided to sally forth to claim your share of lolly? Here are some rules I live by:

Choosing a credit card

Don’t apply for lots of cards when you’re in the market for a loan you actually need. Credit checks lower your credit score. I try to avoid more than one application every other month.

Card fees are OK as long as you spend enough to make sure the offer is still worth it. Maths and budget planning are required.

Jump in quick if an offer is good. Cashback deals can last for years on legacy cards, even when they’re closed to new customers.

Partners are handy if you want to revisit new customer offers. (This is not the only use for partners, I believe).

Spending on credit cards

Put as much of your spending as possible on (your carefully selected) credit cards to maximize your returns…

…but only spend what you would have done anyway.

Don’t withdraw cash on your card. You’ll pay fees.

Don’t put recurring payments on your credit card e.g. subscriptions. They can be hard to stop. Use direct debits instead.

Managing your balance and credit limit

Always pay off the outstanding balance in full every month by direct debit to avoid paying interest. (Except if you’re using a 0% card to stooze.)

Don’t exceed your credit limit. You’ll lose bonuses, pay fees, and generally wreck your upside.

Hacks and hints

Tippex a stripe on any credit cards that look similar to your debit card to avoid mix ups at cashpoints when you’re not paying attention.

Double the power of an offer by putting a loving partner on your account to increase spending. (See? I knew there was another use for them!)

Remember you can claim money back from your card issuer if something goes wrong with any item you’ve bought costing more than £100. A handy feature in these days of failing retailers and online shopping.

Again, there’s no shame in deciding you’d rather not take the risks of credit cards.

Wheezes like these are tasty extras for hardcore money hackers. They’re not essential for sound financial planning.

The best credit cards

The following cards are all highly competitive in their specialist category, at the time of writing.

You may well find offers that suit your circumstances better, depending on where you shop and the lavishness of your budget, so do hunt around.

Oh, and when choosing between simplicity and exception-riddled complexity, I’ve plumped for simplicity every time.

Cashback credit cards

Aim for a card that bags a cashback rate of 1% or better a year.

Favourite for cashback

Aqua Reward Credit Card
Cashback: 3%
Max payout: £100 (spend £3334 to max the cashback)
Annual fee: 0
APR: 34.9% (representative)
Issuer: Mastercard

Best feature The amazing 3% rate.

Worst feature Low initial credit limits (most applicants get £250 – £500).

Beat the low credit limits by paying off your account balance early. Spend £200 on the credit card, then make a £200 payment to your Aqua account via your bank. Don’t wait for the direct debit.

It’s aimed at consumers with a poor credit history or none at all, so it’s pretty easy to get.

Also best for spending abroad.

For a spending splurge

Barclaycard Cashback Credit Card
Cashback: 6% for first 3 months, 0.5% – 2% after that
Max payout: £120 for the first 3 months. £75,000 annual spend limit
Annual fee: £24
APR: 24.6% inc fee (representative)
Issuer: Visa

Best feature 6% cashback on your five biggest purchases of the month, for the first three months, if you make 15 purchases in the month.

Worst feature It’s complicated. See below.

Your top five monthly purchases earn 2% cashback after the 6% rate expires.
Except for your anniversary month when the top five rake in 4%.
You need to make 15 purchases a month to get the boosted cashback rate.
Monthly purchases beyond your top five earn cashback at 0.5%.

After Aqua

American Express Platinum Cashback Credit Card
Cashback: 5% for first 3 months, 1.25% after that
Max payout: £125 at the 5% rate. Unlimited thereafter (spend £2,500 to max the 5% cashback)
Annual fee: £25
APR: 18.5% inc fee (representative)
Issuer: Amex

Best feature 5% introductory rate for new customers. Great when you’re about to spend big.

Worst feature Amex is not accepted by some retailers. Always have a back-up card if you go the Amex route.

2.5% cashback for your anniversary month, if you’ve spent over £10,000 in the previous year.
Minimum household income of £20,000 required.
The cashback return is still good in year two (near enough 1%), if you spend over £9,000 a year.

Alternative to Amex

Capital One Aspire World Credit Card
Cashback: 5% for first 3 months, 0.5% up to £6,000, 1% £6-10,000, 1.25% above £10,000
Max payout: £100 at the 5% rate. Unlimited thereafter (spend £2,000 to max the 5% cashback)
Annual fee: 0
APR: 19.9% inc fee (representative)
Issuer: Mastercard

Best feature 5% intro rate for new customers. Good for the Xmas run-up or other big spending period.

Worst feature Complicated cashback tiers.

Minimum household income of £20,000 required.
The year two cashback return only closes in on 1% if you spend over £20,000 per year. The cashback rate is 0.7% for a £10,000 spend.

The commuter’s choice

Santander 123 Cashback card
This tricky little number is well worth a look if you spend over £100 a month on petrol, rail travel, or London Oyster cards, or you can’t stay out of places like John Lewis and Debenhams.

Rewards and flights

For those who demand their backhanders in goods and services.

Favourite reward card

Amazon.co.uk Credit Card
Reward: Amazon vouchers
1 point = 1p
Annual fee: 0
APR: 16.9% inc fee (representative)
Issuer: Mastercard

Best feature Essentially a 1% cashback card. It goes up to 2% when shopping on Amazon as £1 spent there equals 2 points.

Worst feature Can be beaten by rival rewards cards if you spend BIG at Tesco or Sainsbury’s.

Earn 3 points for every £1 spent in the first 90 days.
£5 Amazon voucher just for passing the trial-by-application-form.

Favourite free flights card

Lloyds Duo Avios Credit Card
Intro bonus: 18,000 Avios points
Miles: 1 for every £1 spent (on the Amex version)
Annual fee: 0
APR: 17.9% (representative)
Issuer: Amex and Mastercard

Best feature Relatively simple, and good if you’re a low earner.

Worst feature There are better cards if you don’t mind fees but they need a massive spend.

The duo bit means you get an Amex and a Mastercard. Amex is better for miles.
Convert Tesco Clubcard points into Avios points.
18,000 point intro bonus if you apply before April 3 2013 and spend £500 per month in the first three months.

Stoozing credit cards

To best arbitrage interest rates, you need plastic that combines a long 0% spending stint with rewards thrown into the bargain.

Remember: There will still be minimum monthly repayments. Set up a Direct Debit to ensure you make them!

Favourite 0% spending card

Tesco Clubcard Credit Card
0% on spending: 16 months
Min repay: Greater of 1% of balance plus interest or £25
Reward: Tesco Clubcard points
Annual fee: 0
APR: 16.9% (representative)
Issuer: Mastercard

Best feature Other than the 0% period, Money Saving Expert calculates that the Clubcard points make this a 0.75% cashback credit card.

Worst feature A relatively high min repayment, but it’s no biggie.

Collect 1 point per £4 spent (£4 min).
Also counts as a Tesco Clubcard. So if you shop in Tesco, you get your Reward points, plus your Clubcard points (and bonus points on Tesco fuel).
Exploiting Tesco Clubcard points is a science in itself. As usual the Money Saving Expert guys are all over it.

Alternative stoozing card

M&S Credit Card
0% on spending: 15 months
Min repay: Greater of 2.5% or £5
Reward: 0.5% back in M&S vouchers
Annual fee: 0
APR: 15.9% (representative)
Issuer: Mastercard

Best feature As well as the 0% period, you get 0.5% back in M&S vouchers as a reward – that’s doubled to 1% for any spending done in M&S.

Worst feature No issues to report.

Prolong the stooze: Instead of paying off the debt when the 0% spending period expires, you can shift it to a 0% balance transfer card. It’s a stay of execution on the debt, enabling you to carry on racking up interest in your savings account. This only works if the balance transfer fee on the new card is less than your savings account interest rate (after tax). Remember to keep servicing the minimum payments and don’t put any new purchases on the 0% balance transfer card – it’s unlikely to give you 0% interest on new spending. You can keep deferring pay-back day like this for a while, though eventually large debts could hurt your credit score. At some point, you’ll need to take the money out of your savings and start again.

Cheap travel money

We’re after a specialist credit card that doesn’t tack commission onto its foreign exchange rates.

Favourite travelling companion

Aqua Reward Credit Card
Commission: Europe 0%, World 0%
Cash withdrawals: Fee: 3% (min £3),
Cash interest: Yes, even if paid off in full
Annual fee: 0
APR: 34.9% (representative), Cash: 39.95% – 59.95%
Issuer: Mastercard

Best feature 3% cashback even abroad.

Worst feature The low credit limit (most applicants get £250 – £500).

Alternatively

Halifax Clarity Credit Card
Commission: Europe 0%, World 0%
Cash withdrawals: Free,
Cash interest: Yes, even if paid off in full
Annual fee: 0
APR: 12.9% (representative), Cash: 12.92 – 21.95%
Issuer: Mastercard

Best feature Free cash withdrawals. Still best to avoid though as you’ll pay interest regardless of direct debit settings.

Worst feature No concerns.

You get £5 cashback per month for spending over £300, if you also have a Halifax Reward Current account.

Special offers

Grab the shiny thing, then toss the card away.

Quick hit and run

Barclaycard Freedom Rewards Credit Card
Freebie: £30 shopping voucher
Condition: Earn 10,500 points by spending £500 in the first 3 months.
Annual fee: 0
APR: 18.9% (representative)
Issuer: Visa

Best feature Low hurdle freebie and good range of retailers.

Worst feature The reward scheme is complex and points are generally worth less than half a penny each.

Earn 1 point for every £1 spent. 2 points at supermarkets and petrol stations and 3 points with certain retailers.

Eyes on a bigger prize

American Express Preferred Rewards Gold Card
Freebie: £100 gift card or BA flights
Condition: Spend £2,000 in the first 3 months
Annual fee: £125 (free in first year)
APR: It’s a charge card. £12 fee if you don’t pay the balance off
Issuer: Amex

Best feature Fly to major European capitals or spend the gift card in the likes of Amazon or M&S.

Worst feature You pay taxes on the flights. Around £30 per person.

Spend £2000 in three months and you’ll earn 20,000 Reward points to spend on the freebie of your choice.
Cancel the card so you don’t cop the big fee in year 2.
Two complimentary airport VIP lounge passes.
Double points on travel, petrol and supermarket spending.
Min household income of £20,000.

Closing credits

So that’s our pick of the best credit card deals available. We hope you find a useful flexible friend among that lot. If anyone has a better choices then please let us know below and we’ll add it in.

Do remember we are not financial advisers. The above pointers are not any sort of personal recommendation as to what you should do. The only thing we’d recommend to everyone is do your own research.

Take it steady,

The Accumulator

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Weekend reading: The best investing books to buy for Christmas presents

by The Investor on November 24, 2012

Plus some good reads from around the Web.

I still give books for Christmas, even if the rest of the world has decided it’s better to try to move all the tat in China here piecemeal via the medium of Beijing-factory-to-UK-landfill.

Surprisingly, I’ve found books about investing and money are presents that tend to be more remembered and mentioned again in the years to come.

Unlike most Christmas presents, financial books can make a positive impact on someone’s life. I’ve seen people changed through the judicious deployment of a money tome, like the old Motley Fool books or the curate’s egg that is Rich Dad.

And while they’re certainly not the sexiest present anyone will receive this Christmas, I’ve noticed people can be strangely gratified when given the right book – even before their financial makeover is underway.

I’d guess it’s because they think you’re taking them seriously in a way that a six-pack of Bart Simpson socks or a bit of sexy lingerie can’t really convey.

Great books for Christmas gifts

Here are some ideas if you want to bask in the kind of quixotic gratefulness that comes my way every December.

They’re not necessarily the very newest books – though none bar Merryn Somerset-Webb’s much-loved one for women is more than a couple of years old – but they’re all very good.

Note: With these various gender-based suggestions, I’m merely following the traditional schtick of Yuletide scribblers down the ages. Obviously anyone is free to read anything they like, and good luck to you.

Best for tiny kids

The Little Prince [An esoteric choice. Nothing to do with money… in theory]

Best for whiz kid 20-somethings

More Money Than God: Hedge Funds and the Making of the New Elite

Best for passive investors

Smarter Investing: Simpler Decisions for Better Results

Best for value investors

The Most Important Thing: Uncommon Sense for the Thoughtful Investor

Best for traders

The Naked Trader: How Anyone Can Make Money Trading Shares

Best for wannabee Warren Buffetts

The Snowball: Warren Buffett and the Business of Life

Best for would-be entrepreneurs

How to Get Rich

Best for cash-strapped cousins

Your Money or Your Life: A Practical Guide

Best for cynics

The Big Short: Inside the Doomsday Machine

What a treat it’d be to receive that little library for Christmas!

[continue reading…]

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Weekend reading: Earning more and spending less is the best investment

by The Investor on November 17, 2012

Good reads from around the Web.

When I were a lad in the late 1990s, it was common for 20-somethings to put £500 into shares of some tech company or another that we felt we knew something about – or perhaps even knew somebody working at.

Our parents were mostly still to get onto email. It was easy to feel you had an extra insight into the dotcom boom.

As it happens, my colleagues and friends and I probably did know something about the ‘new economy’. But we knew very little about investing.

And we all know how that turned out.

These days the stock market is about as fashionable as fondue parties and donkey rides at Blackpool, so there’s not much need to warn anyone of the dangers of investing. Few have spare cash, anyway. While young people are rich in many ways, in 2012 it’s certainly not in terms of the folding stuff.

Some of the new generation are drawn to the markets, however. One young UK blogger, Rob, looked this week at investing on a salary of £18,000, for example.

I would never want to put anyone off investing, but be sure you have a sense of proportion. Putting £50 a month into an ISA to get a feel for market fluctuations while cash is tight I’d heartily endorse. But trying to invest your way to wealth on this level isn’t a great strategy, simply because it’s going to be decades before this sort of money moves the dial. You’d do better to focus on a side income.

As it happens Rob thinks he can save and invest thousands of pounds a year, thanks to low living costs in the North and great budgeting. If so, investing early could make a big difference to his future life.

But many young people will do better to focus on the basics at this stage of their life – which means growing their income and cutting their spending.

As TheZikmoLetter put it this week:

There are other ways you can achieve high returns on your excess cash, without incurring the fees and risks of Wall Street.

You often will not hear these options recommended by anyone who gets paid based on transactions, fees or a percent of assets, but they often offer the best risk-adjusted returns, net of fees, taxes and inflation.

Its suggestions – pay off debt, cut spending, build an emergency fund, and invest in yourself – will be familiar to Monevator readers, but still seem to be novel in the wider world. One reader of Mr Money Mustache reported this week that following sensible money management techniques did more for his net worth than doubling his salary.

As the Mustached mister writes:

… until you see it applied to a real life like this, where the graph of your wealth takes a sudden bend and your mandatory work career is suddenly chopped in half, it can be hard to convince people of just how useful it is to understand your spending, instead of just endlessly chasing more income.

Investing from an early age is an excellent habit to adopt for long-term wealth.

[continue reading…]

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How to research cash flow, balance sheet health, and management focus before buying high-yield shares

by The Analyst on November 15, 2012

Once we’ve employed a share screener to create a shortlist of potential high-yield portfolio candidates, we can begin to research each company more deeply.

We need to look behind the numbers thrown up by the rough-and-ready share screen to determine which companies might be worth investing in for income, and which are not.

We’ll tackle valuation in another article. Today we’ll focus on financial statement analysis specific to high-yield shares, which we’ve previously determined to be those shares yielding at least 1.2x the FTSE All-Share average.

Remember: There’s usually good reason a share is trading with a high-yield. The share price and yield have an inverse relationship, so a high-yield share often has a depressed share price.

The stock market doesn’t always efficiently price shares, but it’s usually not far off, especially with larger companies that attract more investor interest. As such, when researching high-yield shares, our top job is to identify and fully understand why the share is in fact high-yield.

Sometimes the reasons for a high dividend yield are benign, but other times there are good reasons to stay away.

Sustainability first

When we invest in a high-yield share, we’re typically looking to generate above-average income from the investment.

As such, we first want to make sure that the dividend is sustainable. Can the company continue to pay at least this amount to shareholders going forward?

Traditional dividend cover metrics are earnings-based, but I prefer to measure dividend cover using free cash flow. The reason is that earnings are not cash, and since dividends are cash flows, it makes more sense to measure them against net cash flows to the company after it has reinvested in the business.

So how do we measure free cash flow? There are various ways to go about it, but the simplest definition (and therefore the best place to start) is to take cash flow from operating activities and subtract purchase of property, plant, and equipment (sometimes called ‘capital expenditures’ or ‘capex’).

To illustrate, we’ll look at the magazine and bookseller WH Smith. The snapshot below is from page 41 of the company’s 2011 annual report:

WH Smith’s cash flow (Click to enlarge)

Fortunately for us, we can also find the gross dividend paid on the cash flow statement, making free cash flow cover fairly easy to calculate.

Taking numbers from the statement above:

	2011	2010
Net cash inflow from operating activities	£118m	£104m
Less: Purchase of property, plant and equipment	£36m	£24m
= Free cash flow	£82m	£80m
Divided by: Dividends paid	£29m	£26m
= Free cash flow dividend cover	2.82x	3.08x

Source: WH Smith

This is very good cover. What it’s saying is that for each £1 paid out as dividends, the company generated £2.82 and £3.08, respectively, in free cash flow in fiscal years 2011 and 2010.

Note: Firms with free cash flow cover closer to one times should be approached with caution from a dividend sustainability standpoint.

We can also see from the cash flow statement that WH Smith has used most of its leftover free cash flow on share repurchases (that’s ‘Purchase of own shares for cancellation’ on the statement). This is reassuring – if the company has a tough year or two, it might be able to slow down its repurchasing activity whilst maintaining the dividend.

WH Smith dividend payout looks solid from a cash flow perspective, in my opinion. What’s likely keeping the yield high is not its present circumstances, but rather the company’s (arguably) limited potential for growth given the increasing digital competition for traditional books and magazines, as well as wider concerns about spending on the High Street.

Get a longer perspective: Income investors should look at free cash flow cover trends over a number of years – at least seven, if possible – to notice any trends and to monitor interim results.

Balance sheet health

Companies with too much debt often end up putting the interests of their creditors ahead of the shareholders.

One way you can tell this might be the case with a company you’re considering is if its management heralds creditor-focused metrics such as EBITDA (earnings before interest taxes depreciation and amortisation) in its periodic statements, and doesn’t spend much time speaking about shareholder-focused metrics such as net income.

There is such a thing as a healthy amount of debt. All else being equal, companies with stable businesses and strong cash flows should have more debt than highly cyclical businesses, as it can lower the company’s cost of capital (due to the tax deductibility of interest expense) and enhances company value.

Bearing this in mind, we want to compare a company’s debt ratios such as net gearing ((debt-cash)/equity) against its peers and not necessarily on an absolute basis.

If the company has a good amount of debt, it also likely has a credit rating from one of the major agencies that we can consider. However we don’t want to completely rely on someone else’s opinion here. We want to do our own work, too.

We’ll use Imperial Tobacco’s statement as of 30 September to calculate net gearing:

Imperial Tobacco’s balance sheet (Click to enlarge)

To calculate net gearing, we add current and non-current borrowings (£1,234 + £8,333) and subtract cash and cash equivalents (£631) to arrive at net debt (£8,936). We then divide net debt by net assets (£8,936 / £6,084) to get a net gearing ratio of 147%.

Now that we have that information, let’s see how Imperial Tobacco stacks up against its global peers:

Company	Net Gearing	S&P Credit Rating
Philip Morris International	N/A	A (stable)
British American Tobacco	128%	A- (stable)
Reynolds American	45%	BBB- (stable)
Altria	302%	BBB (stable)
Imperial Tobacco	147%	BBB (stable)

Source: Public filings, as of most recent report. PMI has negative shareholder equity.

As you can see, there’s some variance in net gearing across the global tobacco industry, but Imperial Tobacco is not an outlier.

Other factors may also be influencing the S&P credit ratings including litigation risk, pension deficits, different leverage ratios, and the outlook for each company’s tobacco volumes.

Management

A high-yield share may check out on free cash flow and balance sheet metrics, but we’re also interested in management’s track record of allocating capital and its attitude toward dividends.

To start, we want to see how effectively management has allocated capital between acquisitions, share repurchases, and dividends. At the very least, we want to be able to answer the following questions:

What’s the company’s dividend track record? Does it have a stated dividend policy?

How many acquisitions has the company made in the past five years? How large were they? Has the company been forced to take impairment charges subsequent to those acquisitions?

Has the company repurchased shares at opportune times, or does it simply repurchase shares when it is flush with cash?

Ideally, we want to find companies that have at least a five-year track record of paying dividends and those with a stated dividend policy tied to either earnings per share or free cash flow. The reason for this is we want to be sure that dividends are ingrained in the corporate culture and important to the shareholder base.

Because high-yield shares also tend to have slower growth rates, they can be keen on making acquisitions to boost growth. As such, we want to identify companies that have made logical acquisitions – that is, acquisitions that complement its existing business – and paid good prices for them. If the company has a history of impairment charges, for instance, it may be a sign that it isn’t a good acquirer.

Finally, if a company does engage in share repurchases, we want to see that it has repurchased shares for the right reasons (i.e. the share is undervalued) and not simply because they have extra cash lying around.

Take a look at a company’s annual reports, which tell you how many shares it repurchased and how much it paid for those shares. If they have consistently paid too much, it could be a sign of poor capital allocation skills. Too many value-destructive acquisitions and the dividend could eventually come under pressure.

Do your best

Analysing free cash flow cover, balance sheet health, and management’s capital allocation skill helps us to determine dividend sustainability, which is the key to a strong high-yield dividend share.

We remain, of course, susceptible to luck despite best research efforts. Unexpected things can befall any investment thesis – both good and bad – so it’s important to remain diversified and pay attention to valuation, which we’ll discuss in a future article.

You can bookmark all The Analyst’s articles on dividend investing. The archive will be updated as new dividend articles are posted.