Saturday, May 9, 2020

Capital One 360 Money Market Account - After Two Years

Most banks are paying fractional interest rates these days.  Why is Capital One paying more?

Banks need money.   The traditional model of banking was the bank would take deposits and pay interest to depositors.   They would then take this money and lend it out in the community and receive interest payments from borrowers.   "Bank Interest" was 3% for savers, 6% for borrowers, and the bank covered its overhead and made a profit on that narrow 3% margin.   As you can see, there is little headroom to "forgive" loans.

Today, the model is somewhat different.   Banks borrow money from the Fed, and loan it out as mortgages and car loans - when they can.  Borrowers increasingly are using the internet to find a mortgage lender, or the car dealer (who has a captive loan company) to borrow money.   The idea that the money in your community is circulating is long gone.  And a big part of a bank's profits these days is from credit card interest charges, credit card fees, as well as late fees and service fees for sketchy customers (who bring woe upon themselves, as I did, as a youth, by failing to balance their accounts, daily.   People have four hours to spend playing an online game, but won't spend 10 minutes on their bank's website - a far more rewarding "game" in my opinion, as it pays out regularly).

Banks need to be solvent, however, and after each financial crises, the government requires that banks keep more capital on hand.   The problem with this "new" model of banking is that banks no longer need to have substantial assets - they can simply borrow money from the Fed and then loan that out to people, regardless of their ability to pay back.    In fact, the system encourages bad loans, as banks are not loaning their "own" money, but rather the government's - and often, as in the case of mortgages and student loans, these loans are guaranteed by the government.

Why did we do that again?  Oh, right, to help the little pee-pul.   Sounds like it helped the banks a lot more -  and left the pee-pul on the hook for these loans, either personally, or through their tax dollars.  A crazy idea, I know, but maybe we should go back to the old ways of lending money only to people who will pay it back.

But I digress, once again.

During the Obama administration, they passed new laws and rules requiring banks to have more cash on hand.  Every time there is a recession, this happens, going back to the crash of 1929.   During the 1930's, my Grandfather was a banking attorney, working for a law firm that represented City Corp, which is now Citibank.   He was also head of the banking committee of the New York State Bar.  My Mother recalls him flying down to Washington, DC, from Idlewild Airport on long island, on sputtering Ford Trimotors, to meet with government officials to hammer out new banking regulations.

It is a cyclical pattern - during recessions, people elect Democrats to fix things - Roosevelt in 1932, Kennedy in 1960, Carter in 1976, Clinton in 1992, Obama in 2008. Each time, the Democratic victor is handed an economy in recession, if not in outright ruins, and they have to struggle to repair it.  And Republicans will use this as "evidence" that the economy never does well under Democrats!

Some economic reforms, however, can cause difficulties.   For example, during the Clinton years, they required banks to keep more cash on hand to improve their balance sheets and liquidity.  How do you go about doing that, particularly when given a short deadline?   One way is to call notes on some of your business loans, which puts the business owner in a difficult situation, often forcing him out of business.  A business that was struggling in a recession, can be pushed under when forced to repay its debts all at once.

Another way is to entice people to deposit money by offering attractive interest rates.   Capital one did this a few years ago, by offering a $200 bonus if I would deposit $10,000 into a "Capital One 360 Money Market" account.   Not only that, they would actually pay interest on the balance - interest more than the fractional percentages I was getting at Bank of America.

I was skeptical at first - they had so many caveats on this $200 deal that I was sure they would find an "out" not to pay it.  But they paid it - almost right away.

So how has this Captial One 360 account worked out?  I thought I would take a look, and created the "report" shown above in Quickbooks, which I can do as I log every goddamn thing in life on Quickbooks, which tells me what is going on.

In two years, in addition to the $200 bonus, I received $376.48 in interest payments, which works out to about 1.8% interest - about $15 a month.   For the same amount deposited in my Bank of America or Ameris accounts, I get maybe a couple of bucks a month - if that - as they are paying fractional interest rates (e.g., 0.2% or something stupid like that).   In fact, it is more of a pain-in-the-ass to enter these deposits in Quickbooks, as they are so small.

But I do, daily.  I log every single goddamn thing.   You should too, particularly if you are struggling with money.

Is this Captial One 360 Money Market for you?   Maybe.  Maybe not.   I am at a stage in life where I am spending money, not saving it.  I need a place to park cash that I spend every year, after I take it out of my IRA.   I don't want to put it into stocks or other high-risk investments, even if the long-term rewards are greater, as I am not keeping this money for the long-term.

Then again, everyone should have a "rainy day" fund, and if you need to park that somewhere, well, 1.8% beats 0.2% anyday.  In fact, I asked myself why I was bothering to keep money in low-interest savings accounts in the bank, when it is so easy to electronically transfer funds into (and back out of) this Capital One account.  So I did.

And actually, with the $200 deposit bonus, the actual "interest rate" amounts to more than 2.8% interest overall.  Yes, Capital One still is offering this deal - or one like it.  The cash bonus is only $100 these days (for every $10,000 deposited). the interest rate is 1.5%.   The bonus applies only to new accounts only, so unless they allow me to open a second account, I doubt I will qualify (and yes, Mr. See also has an account with Capital One).

I just tried to do this, in fact, and it won't let me take a second bite at the apple:
To earn a bonus, open a 360 Performance Savings account between 12:00 a.m. ET on April 16, 2020 and 11:59 p.m. ET on May 31, 2020. If you have or had an open savings and/or money market account (excluding CDs, IRA savings accounts, and Kids Savings accounts) as a primary or secondary account holder with Capital One on or after January 1, 2016, you're ineligible for the bonus. Deposit a total of $10,000-$50,000 or more of new money from an external bank (transfers between Capital One accounts will not qualify) within 10 days of account opening (Initial Funding Period). Maintain the required daily balance within a bonus tier for 90 days following the Initial Funding Period, and earn $100 for every $10,000 maintained (up to $500).
Damn.  Why should the newbies get all the gravy?  Oh, right, to encourage more newbies.

Captial One has low interest rate "plain jane" credit cards, which both Mr. See and I have as backup cards in case some emergency comes up.   As we get older, we need such cards less and less.  But during our working years, when we had little in savings (or "rainy day" funds) such a low-interest card can be handy if you have a sudden "unexpected" expense (which are usually expected, but I digress).  By the way, these low-interest cards are available from Capital One (and most Credit Card companies) but are rarely advertised or promoted - in fact, I am sure they will claim such cards do not exist!

7.15% interest is not a great deal, but then again, I've had mortgages with higher interest rates.  Capital One would sure love it if I took out a "cash advance" though!   Akin to a payday loan!

But seriously, if you have chronic credit card debt or your finances are pretty thin, a low-interest rate card is the way to go.  It is only after you've dug yourself out of the debt hole and gotten your financial house in order (and again, balance your accounts every month, know the due dates, interest rates, and closing dates of all your credit cards and log every goddamn purchase every single fucking day on Quickbooks or some other financial software on your computer - not a cell phone, or some stupid online pie-chart waste-of-time) that you can even think about rewards cards.  And even then, they should make you as nervous as carrying a loaded handgun.

Yes, they also have a "rewards" card - the Quicksilver - which Mr. See has, but rarely uses. I got this for him as I realized most of our credit was with me as the primary credit holder, and that he had few "stand alone" accounts.  Again, rewards cards are like loaded handguns, in that if you don't pay off the balance every month, the interest wipes out the rewards in short order and could end up bankrupting you, or at least starting a personal credit card crises.

However, we travel to Canada a lot, and Capital One has a good exchange rate (no processing fee, unlike Bank of America).   BoA will "waive" these processing fees if you call and are a "Platinum" customer, but you have to call, and it should be automatic.  And as I recall it is something like 3% which is scandalous.   (If you don't think 3% is a lot of money, have your financial head examined).  So when in Canada, we use Capital One.

Why do we still use BoA?  Well, the "rewards" there amount to over $120 a month, with the "bonus" applied for "Platinum" members.  Yes, I am playing the steal-the-cheese game, as I am debt-free and can get away with it.

But when I started this blog?  With fifty grand in credit card debt?  Uh, no.  But that's the problem for most of us plebes.  We go to a financial site or discussion group, and people say, "Oh, you should get a rewards card!   3% balance transfer, no payments for 6 months and you get airline miles!" and people jump on that - after all, it was "good advice" from "financial gurus" - right?

Six months later, they've increased their credit card debt by another few thousand, and now the 22% interest kicks in, pretty much wiping out a year's worth of  those "rewards" points in a single month.

(Speaking of airline miles - they were worthless before, I wonder what they are worth today?  I mean, given that no one is flying these days, and if airlines go bankrupt, you may be little more than a creditor in bankruptcy.   If you go for "rewards" go for cash.   They can't take it away from you - cash never "expires").

But that's why I don't give advice here.    I don't know what your personal situation is - are you mired in debt, or well-off?  Are you still in high school or in the retirement home?  It makes a difference, what your life situation is - so one-size-fits-all advice never works out well.

Besides, what I have found in life is that people seeking advice are either looking to validate what they have already decided (and you can tell this by the way they present selected facts that lead to only one conclusion - or even tell you the conclusion and ask if it is right).   And/or they are looking for someone to blame when it all goes wrong.   "I just did what you told me to do, and now my life is in ruins!" they cry.  Of course, they did only half of what you told them to do (they put money into 401(k) savings, but kept spending like drunken sailors and wondered why they went broke) or they basically lied to you when they presented their fact scenario.

Ya gotta make your own choices in life, live with them, and own up to them and live with them when they go wrong - or right.   Sadly, that seems to be a vanishing aspect of human character these days, particularly with our externalizer-in-chief who has a regular retinue of whipping-boys to blame when things go wrong for him - the media, China, immigrants, Democrats, Nancy Pelosi.

But once again, I digress...