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The Forbes Guide to Credit Cards

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Prepaid Debit Cards

Prepaid debit cards are not credit cards and they don‘t help you build your credit history. But if you do not have a bank account or if you want more control over your spending you might choose to use one of these cards for convenience. That’s because prepaid cards generally can be used anywhere that accepts credit cards.

Prepaid cards operate similarly to checking account debit cards. But since a prepaid card doesn’t have a checking account to draw from, you must first load money onto it before you can use it. Prepaid debit cards are reloadable, so you can continue to use the same card again and again.

There are a variety of ways to load money onto a prepaid care. For example, they generally accept direct deposit of paychecks, tax refunds, and government assistance payments. Many cards offer account access online and through a smartphone app. They also offer text alerts for low balances or other account changes. Prepaid cards often come with extensive fees, so one must understand the card’s fees before selecting a prepaid card.

Credit Card Networks

American Express, Discover, MasterCard and Visa are the largest credit card networks in the U.S. The most widely used network is Visa. According to Statista, an online market research portal, Visa had 337 million credit cards in circulation in the U.S. in the fourth quarter of 2018. Visa is accepted at over 46 million merchant locations, used by nearly 16,000 financial institutions and in over 200 countries, MasterCard had 231 million credit cards in U.S. circulation at the end of 2018 and AMEX had 54 million.

The Pros and Cons of Using Credit Cards

The Pros:

  • Protection – Federal consumer protection laws provide that your personal liability for credit card fraud is a maximum of $50 if you report that your card is lost or stolen within two days of realizing it.  (Many credit card companies, however, offer $0 liability so long as you timely report the loss.) If you don’t report a card theft or loss within two days, your liability increases to $500. If you still have physical possession of your card and there are fraudulent charges made on it, you have $0 liability so long as you report the fraud within 60 days of the time your card statement showing the fraud is sent to you.
  • Convenience – Credit cards are easy to use because they are accepted by most merchants, they are handy for moments when you don’t have cash and if a card is lost or stolen, your potential liability is limited.
  • Rewards – Credit card issuers like to reward customers for their business or loyalty with discounts and prizes.

The Cons:

  • Easy to Accumulate More Debt – Spending past what you can afford and missing your payments equals more debt than you can handle and a poor credit score.
  • Convenience – The convenience of these cards encourages people to spend more and use it more frequently than if they only had cash or a debit card. A 2001 study by Drazen Prelec and Duncan Simester on willingness-to-pay illustrates that participants were more willing to pay for an item when they were told to use credit instead of cash. It’s good business for banks, but it can be bad for your net worth..
  • High Interest Rates and Fees – These can get you into more financial trouble when you fall on hard times.

Credit Cards and Your Credit Score

We can’t give you a guide on credit cards without discussing credit scores. Credit card issuers use credit scores, which are based on your ability to manage credit as reported in your credit bureau file, to evaluate your creditworthiness.

Between VantageScore, FICO scores and specialty credit scores for renting or employment, you have many different credit scores. The one most widely used by credit card companies is a FICO score, which ranges between 300 and 850. The lower the score, the more of a credit risk you seem to creditors. The higher the score, the more creditworthy you seem to creditors.

Your FICO score is based on five factors:

  • your payment history (35%)
  • the share of your credit lines you are using (30%)
  • the length of your credit history (15%)
  • the diversity of your credit (10%)
  • new credit accounts you have opened in the past 12 months

Once you’ve applied for a credit card, the issuer performs a hard pull on your credit report to evaluate your creditworthiness. They might look at how much of your available credit you are using, how long you’ve held credit and if you are good at paying off your balance (or at least keeping it low). They also might check how many credit accounts you’ve recently opened and what type of credit you have received. What a credit card company looks at depends on that company’s approval process.

The credit pull helps credit card companies decide how high an APR you are eligible for. High credit scorers (700 and above) could qualify for a lower interest rate compared to low scorers. Credit card users who prefer to carry a balance instead of paying their balance off every month should aim to get the lowest interest rate. That way, they’ll pay less interest.

Use your credit cards with your credit score in mind and allow it to work for you, not against you.

Credit Card Sign-up Bonuses

Banks, especially major ones, offer bonuses for switching to their services. Common sign-up bonuses include cash bonuses of up to  hundreds of dollars, if you spend a certain within the first several  months of opening a card. These case rewards can come as statement credits on your bill, or even checks. Credit cards that offer reward points also offer sign-up bonuses equal to thousands of points that can be redeemed for merchandise or trips.

Pay attention to the fine print. Some banks will use the bonus as a token of their appreciation for your business while others will make you jump through hoops. You could find a bank who will give you cash for simply opening a new account with them. Or, you might choose a credit card where you would have to spend a few hundred or even a few thousand dollars to qualify for the sign-up reward. The fine print will tell you what you have to do to qualify for the sign up bonus. It will also tell you whether you would qualify to participate in getting the bonus. Some issuers will clearly state in the section that you are not eligible for the bonus if you’ve already received one from them within the past one or two years.

There are a couple of other things to watch out for with sign up bonuses, including hidden fees that could diminish your bonus. Finally, be sure to compare other sign-up bonuses currently offered by the same bank for other cards (they may be even higher) and by other banks.

Credit Card Fees

Types of credit card fees:

  • Late payment fee: Credit card issuers charge you a fee for any payments deemed late.
  • Balance transfer fee: When you transfer your balance from one card to another, you may incur a fee on the card receiving the balance transfer.
  • Cash advance fee: You may find yourself in a situation where you need cash  and you don’t have your debit card on you. You can withdraw cash from your credit card for a percentage fee.
  • Foreign transaction fee: When you use your credit card outside of its country of origin, the issuer will charge you a fee to cover the costs associated with using a foreign bank or foreign currency. Some cards, particularly those that are travel-related, waive this fee.
  • Over-the-credit limit fee: This is much like the overdraft fee you see with checking accounts except it’s a charge the issuer adds to your bill for covering a transaction that went over the card’s credit limit.
  • Annual fee: This is an account maintenance fee that you would pay annually. Some accounts make you pay monthly. Many cards come without an annual fee.
  • Returned payment fee: When your credit card payment fails to go through because of insufficient funds, the card issuer will charge a fee.
  • Convenience fee: Some merchants will charge you a fee for using a credit card instead of cash.

Managing Credit Card Debt

People manage their credit card balances in two main ways and be described as either revolvers or transactors.

Revolvers leave a balance on their card and repay what they borrowed over time. They may make minimum payments, which carries interest and a bit of the principal, or chip away at the balance with a larger than minimum payment. Timely minimum payments keep you in good standing, but they also lengthen your time repaying the debt and cause you to pay more in interest. Because of this, we recommend revolvers aim for credit cards with low interest rates to save money.

Transactors are people who pay their balance off at the end of every month. These people might not worry about interest rates much since they avoid interest charges by paying off their balance in full each month. Instead, they should generally opt for credit cards that offer the highest rewards.

An interest rate, also known as the annual percentage rate (APR), is the yearly cost of the credit you are borrowing from a financial institution. A financial institution could be a traditional commercial bank, credit union or an investment bank with banking services. The APR is determined by your creditworthiness (i.e. credit score) and also by what you do with the credit card.

Some credit cards charge different APRs for different types of transactions. For example, the APR on purchases can be different than the APR on cash advance. A penalty APR can be even higher and apply when a cardholder violates the terms of the credit card agreement (e.g., missing a payment or going over the credit limit). If you slip into a penalty APR, you could go, for example, from paying an 18% APR on an outstanding balance to a 29% APR.

Grace Period

To avoid interest charges, you’ll need to be a transactor and pay your debt off every month by the due date. The time between the end of your billing cycle and due date is known as the grace period. Grace periods are at least 21 days and last up to the payment due date. By paying during the grace period, you avoid interest and only pay for the purchases.

When you fail to pay during that period, you incur interest and usually, a late payment fee. If you make a partial payment or a minimum payment instead of paying off your bill in full, you will also incur interest. What’s more, you’ll end up waiving your grace period for the next billing cycle until the bill is completely paid.

Balance Calculation Methods

Credit card companies have a few different ways of calculating interest. They can use either a daily periodic rate or a monthly periodic rate. The daily periodic rate takes the APR and divides it by 365 and then multiplies that number by the number of days in the billing cycle. Next, banks take that figure and multiply it by the outstanding balance. The monthly periodic rate is similar except it is the APR divided by 12 months.

Differences in  calculation methods don’t stop at periodic rates. The rates are applied to the balance in various ways such as the adjusted balance, the average daily balance excluding new purchases, the two-cycle average daily balance including new purchases and the two-cycle average daily balance excluding new purchases. The least expensive are the adjusted balance and average daily balance (ADB) excluding new purchases. The most expensive are two-cycle ADB including new purchases  and the two-cycle ADB excluding purchases.

Adjusted Balance

Credit card issuers charge an interest (1/12 of the APR) on the remaining unpaid balance after payment is due.

Average Daily Balance

For the average daily balance, credit card issuers charge interest from the date of the purchase. If payment hasn’t been made by the due date then interest will accrue. The bank decides whether new purchases will be included or excluded from each billing cycle.

Here’s an example calculation

Daily balance with new purchases = Beginning balance – (payments + credits) + (purchases + fees)

ADB = Sum of Daily Balances / Number of Days in the Billing Cycle

Two-Cycle ADB

This method has fallen out-of-style, but it still exists. The two-cycle ADB adds a current billing cycle with the billing cycle before it to calculate your interest. According to the Consumer Finance Protection Bureau, both the current and previous balances are calculated the same. The balances (including or excluding new purchases, and subtracting payments along with credits) of each day are added together and then divided by the number of days in the billing cycle. As you would imagine, this balance calculation method is expensive for the cardholder..

Making the Minimum Payment

When you make the minimum payment on a credit card bill, you are paying a percentage of the principal and the interest that accrued for that billing cycle. Usually, the minimum payment is a percentage of your balance, plus any interest and fees.

Minimum Payment = % of the balance + any interest and any fees 

In your card member agreement you’ll find information about how you are charged an interest rate, what that interest rate is and what percentage of your balance will be your minimum payment. For example, my credit card agreement states that my minimum payment will be 1% of my balance plus the interest that accrues over my 26-day billing cycle. The interest doesn’t get applied until the end of the billing cycle.

Paying the minimum means you plan to carry a balance into the next billing cycle on your credit card. If you don’t pay the balance off in full by the next bill then your minimum payment will increase because you will have accrued more interest.

Making the minimum payment is one option in paying down your debt, but it takes longer and costs you more. The longer you wait to pay off a balance, the more you pay in interest (the fee the credit card issuer charges you for borrowing its money). To some cardholders, the minimum seems like a good idea since you’ll have more cash in your pocket, but there’s better ways to pay off your balance. It’s important to note that you should always—at least—pay the minimum to keep your payment history in good standing.

Low Interest Rate vs. Rewards

If you are searching for rewards cards, weigh the cost of the card against the rewards. As suggested before, revolvers should aim for cards with low interest rates. The rewards (points, miles, cashback) that are part of high interest cards may not outweigh the costs in fees and interest.

Credit Cards should be seen as tools and not as goals. Your goal should be to be as financially healthy as you possibly can. You can use credit cards to do that by choosing ones that will maintain or improve your credit file and score, enhance activities you already do such as travel, protect your cash and and are convenient.

-Asian Martin; Forbes Staff

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Wealth

Jeff Bezos Is No Longer The Richest Person In The World After Amazon Stock Plunges

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Amazon founder and chief executive Jeff Bezos lost his title as the richest man in the world during after-hours trading on Thursday, after his ecommerce behemoth reported lackluster third-quarter earnings. 

Amazon shares fell 7% in after-hours trading, knocking Bezos’ fortune down to $103.9 billion. That puts him at number two among the world’s richest. The new number one: Microsoft cofounder and fellow Washington state resident Bill Gates, who is worth $105.7 billion. 

Bezos became the richest man in the world in 2018 and the first centibillionaire to ever appear on the The Forbes 400 that year with a net worth of $160 billion, ending Gates’ 24-year run as number one. 

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But the Amazon chief executive’s net worth drop isn’t entirely due to the decline in Amazon shares. Bezos transferred a quarter of his Amazon stake to his ex-wife MacKenzie Bezos as part of their divorce settlement, which was finalized earlier this year. MacKenzie Bezos is worth $32.7 billion, and among the top twenty wealthiest people in the world. 

On Thursday afternoon, Amazon reported a 26% drop in net income in its third quarter, its first profit decline since 2017.  In after-hours trading, Amazon dropped nearly 9% to $1,624 per share in the 20 minutes after the market closed. It has since rebounded slightly, hovering at $1,657 per share at 7:30 p.m. ET

The company said it is investing heavily in logistics and delivery infrastructure, with the goal of making one-day shipping the norm for Amazon Prime members.

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The company disclosed during its second quarter earnings call in July that it had spent “a little bit” more than the estimated $800 million that it has previously said it would invest in one-day shipping infrastructure.

The company declined to disclose how much it had spent on one-day shipping in the third quarter. But chief financial officer Brian Olsavsky did disclose Thursday that the company plans to spend $1.5 billion in the fourth quarter, presumably to finance the one-day shipping initiative. 

Gates, meanwhile, has been out of Microsoft since 2014 when he stepped down as chairman of the storied company, though he remains a board member. He has sold or given away the majority of his Microsoft stake and diversified his wealth over time. He is now the co-chairman of the Bill & Melinda Gates Foundation, the largest private charitable foundation in the world. 

Bill Gates debuted on Forbes’ first ever billionaire list in 1987 with a net worth of $1.25 billion. Bezos first joined The Forbes 400 list of richest Americans in 1998, one year after Amazon went public, with a net worth of $1.6 billion. 

-Angel Au-Yeung; Forbes

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Lists

These Are The Biggest Givers On The Forbes 400

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This has been a year of record-setting in billionaire philanthropy. In September, Stewart and Lynda Resnick, owners of POM Wonderful and Fiji Water, pledged $750 million to the California Institute of Technology for environmental sustainability research.

In June, Blackstone cofounder Stephen Schwarzman donated $189 million to the University of Oxford—the largest single gift to the school since the Renaissance—to fund its work on humanities. The same month, Broadcom billionaire Henry Samueli pledged $100 million to UCLA’s engineering school, the largest gift ever to the department. 

Forbes tracks gifts and pledges like these as part of our ongoing coverage of charitable giving by the country’s richest people.

READ MORE | The World’s Most Generous Billionaires Outside Of The US

For the second year in a row, Forbes tracked the philanthropic giving of the richest 400 individuals in the U.S. and gave each member of The Forbes 400 list a philanthropy score. The score ranged from 1 to 5,  with 5 being the most philanthropic. List members for whom we could find no charitable giving information received an N.A. (not available).

Philanthropy Forbes 400
FORBES

Though the number of the biggest givers—those who scored a 5—stayed flat in 2019, those who received scores of 4 and 3 increased compared with a year ago.

The changes reflect two things: The country’s richest have gotten somewhat more generous, and Forbes had more information to work with this year. Some billionaires were willing to share information on charitable giving for the 2019 list who didn’t in 2018. As a result, four dozen people got higher scores this year than a year ago. 

This year, Warren Buffett led the list of top givers with $38.8 billion in lifetime giving, which is 32% of his net worth, and earned the top score of 5.

He was followed by last year’s biggest giver, Bill Gates, who has donated $38.5 billion so far. Two people who scored a 5 last year—Paul Allen and David Koch—passed away.

READ MORE: Forbes Africa | 8 Years And Growing

Billionaires like DreamWorks Pictures founder David Geffen and WhatsApp cofounder Brian Acton moved up to the top score after each scored a 4 last year. According to the latest tax filings, Geffen gave $38 million to his foundation in 2017, which brought his lifetime giving to about $1 billion.

Acton and his wife Tegan, on the other hand, have been expanding their philanthropic network, Wildcard Giving, which they founded in 2014 after Acton sold WhatsApp to Facebook. The couple has given away more than $1 billion to charitable causes.

2019 Forbes 400 Giving
FORBES

Forty-one billionaires, including Netflix cofounder Reed Hastings and software billionaire Philip “Terry” Ragon, got higher scores this year than last year. Some, like Stephen Schwarzman, earned a higher score thanks to giving in the past year.

Others scored higher because we were able to find more information about their lifetime giving, through new public documents or details provided to us by Forbes 400 members or their spokespeople. In September, a Los Angeles Times report revealed that B.

Wayne Hughes, cofounder of self-storage behemoth Public Storage, had anonymously donated about $400 million to the University of Southern California in his lifetime. Hughes, who scored a 2 last year, jumped up to a 4.

Private equity tycoon Robert F. Smith’s pledge in May to wipe out the student debt of the entire 2019 graduating class of Morehouse College generated lots of headlines but did not end up changing his score because the gift wasn’t big enough to move him up a notch. In many cases, fortunes grew faster than lifetime philanthropic giving. 

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To come up with the information on which we based our score, Forbes reporters looked at tax filings for charitable foundations, annual statements, SEC filings and news about new gifts. When possible, we interviewed Forbes 400 members and executives from their foundations. Some Forbes 400 members said they have chosen to donate anonymously, citing religious or privacy concerns. 

Our score is based on total lifetime giving and what percent of their fortune members had given away. We weighted these two factors equally. Some individuals were then bumped up or down based on several other factors, including whether they had signed the Giving Pledge, whether they had pledged significant donations, how personally involved they were in their charitable giving, and how quickly and effectively their private foundations distributed dollars. We didn’t count pledges or announced gifts that have yet to be paid out, but we took commitment to philanthropy—or lack thereof—into account.

Forbes has been tracking the wealth of the richest Americans since 1982. “Some of [the members] told us to drop dead,” James Michaels, veteran editor of Forbes, told the New York Times in a 1982 story about the list’s debut. “They said they wanted no part of it, that they’d sue us.

This happens in reporting.” At times, our reporting on philanthropic giving received a similar response. “The new philanthropy ranking is fundamentally flawed, in that it is biased in favor of those who make their gifts widely known, and against donors who choose to make their charitable contributions anonymously,” one current Forbes 400 member (who did not wish to be named) wrote to us last year.

-Deniz Çam; Forbes

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Cover Story

Mastercard: Diligent About Digital In Africa

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Mastercard knows only too well that technology can drive inclusive financial growth with simpler and more efficient ways to do business and life. And Raghu Malhotra, the man spearheading this trajectory in Africa, is also focused on social progress.


In many ways, Raghu Malhotra is like the brand he works for, leaving his footprints in different parts of the world, and in some cases, the most unlikely corners.

On a scorching summer’s day in June 2016, Malhotra traveled 100km east of Jordan’s capital city Amman, to a camp with white tents named Azraq built for the refugees of the Syrian Civil War.

In the desert terrain and hot, windy conditions, people had to queue for hours on end for plates of food handed out of visiting trucks. But some of them, displaced and homeless overnight, expressed their gratitude to Malhotra, President for Mastercard in the Middle East and Africa (MEA).

Mastercard, a technology company that engages in the global payments industry, had distributed e-cards, as part of a global collaboration with the World Food Programme, to the refugees that they could now use to purchase food and other supplies from local shops.

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 “I spoke to the people myself and saw what their lives were… Even those who were doctors with their families and were displaced… They said to me ‘you have restored dignity to our lives; you have no idea how demeaning it is to queue up to be given food’… We actually digitized how that subsidy for food was given. Some of these things go beyond economics,” says Malhotra. 

Beyond economics.

That very simply sums up Malhotra’s mandate for Africa as well.

The New York-headquartered Mastercard, ranked No. 43 on Forbes’ list of the World’s Most Valuable Brands, with a market cap of $247 billion, which connects consumers, financial institutions, merchants, governments and business, is fostering key partnerships across the African continent to help drive inclusive economic growth.

The idea, Malhotra says, “is to get our global skill-set to operate in its most efficient form in every local economy, at the same time, we must do good, and it must be sustainable.”

He calls Africa the next bastion of growth for various industries.

“As a company, we have stated we are going to get 500 million new consumers globally. And Africa plays a big part of that whole story… We want to be an integral part of various economies here,” says the man responsible for driving Mastercard’s global strategy across 69 markets.

Raghu Malhotra President for Mastercard in the Middle East and Africa. Picture: Motlabana Monnakgotla

“It probably took us over 20 years to get the first 50 million new consumers, in my part of the world, which is the Middle East and Africa (MEA). It took us probably five years to get the next 50 million, and last year alone, we put over 50 million consumers [in the formal economy] in MEA. That is part of our whole African story, so this is just not rhetoric; we are actually building our business on that basis.”

Home to four of the world’s top five fastest-growing economies, Africa has the fastest urbanization rate in the world, the youngest population, and a rapidly expanding middle class predicted to increase business and consumer spending.

It’s a continent of opportunity for global players like Mastercard with an eye on the potential of a booming consumer base and small and medium entrepreneurs, most of whom are still not a part of the formal economy. A large proportion of Africa is still unbanked. There is enough business opportunity in offering people digital tools so they can lead respectable financial lives.

READ MORE | The Monk Of Business: Ylias Akbaraly Talks About Secret To Success And Plans To Take Africa With Him

But it is in knowing that financial inclusion is not just about technology, but more about solving bigger problems, as the World Bank says in its overview for Africa: “Achieving higher inclusive growth and reaping the benefits of a demographic dividend will require going beyond a business as usual approach to development for Africa. Going forward, it is imperative that the region undertakes the following four actions, concurrently: invest more and better in its people; leapfrog into the 21st century digital and high-tech economy; harness private finance and know-how to fill the infrastructure gap; and build resilience to fragility and conflict and climate change.”

And in order to enable financial access, Mastercard has a balanced strategy in place, with the right partnerships for inclusive growth on the continent, Malhotra tells FORBES AFRICA.

“Every emerging market has different segments of people and you need to get the right product for the right segment. What we do is a balanced growth strategy across the continent based on timing, opportunity etc… Of course, because the bottom of the pyramid is much bigger, I think what we need is to adapt things differently; that is where the inclusive growth story comes from. That is where the opportunity is, but there is a second part to it…” And that, he summarizes, is advancing sustainable growth, doing good and bringing more transparency and efficiency.

The new pragmatic dispensation of governments in Africa towards ideas, technology and innovation has surely helped open up the stage to newer segment-driven products, especially as Africa already has such global laurels as Safaricom’s mobile money transfer and micro-financing service M-Pesa that took financial access to a whole new level. Also, sub-Saharan Africa remains one of the fastest-growing mobile markets in the world.

READ MORE | Feisty And Fearless Pioneers Thandi Ndlovu & Nonkululeko Gobodo

Malhotra says he finds African governments consistent in how they are rolling out their digital vision, and in trying to collaborate towards creating better ecosystems for their economies, though each is unique with its own dossier of problems.

“When I speak to various governments around Africa, I see a commonality of what their needs are and I also see a commonality in how they are trying to respond. So I think a lot of them realize running cash economies is a very inefficient way of doing things… Also, the consumer base is much more open to new technology because there is no bedded infrastructure or legacy infrastructure. I think where governments need to start thinking a bit more is how much do they want to do completely on their own.”

Part of this transformation on the path to financial progress is alleviating the burden of cash. Cash still accounts for most consumer payments in Africa. Mastercard, which started out as synonymous with credit cards, continues its efforts to convert consumers from cash to electronic transactions, and move beyond plastic.

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