The best cash-back card around

Do you pay off your credit card balances in full every month? Do you like tax-free income? Then I have a deal for you: the best cash-back credit card out there.

But maybe this story isn’t for you.

There are two Americas. One is Spender America. This part of the country carries $830 billion in credit card balances, struggling with stiff interest rates and never getting clear of debt. Americans owe $10 trillion on their mortgages, and, despite desperate efforts by the government to inflate housing prices with subsidies and bailouts, a lot of these mortgages are for more than the houses are worth.

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Saver America has money sitting around: $7.7 trillion in cash, bank accounts and money-market funds. Roughly a third of houses are owned free and clear. Roughly a third of households pay off their credit card balances in full every month.

Which group are you in? If you are in the first group, avert your eyes. My tips on credit card choices will not be useful to you, and you won’t like the politics at the end of the story.

Savers: Get one of those “Retirement Rewards” cards issued by Fidelity Investments in conjunction with American Express. You get back a flat 2% on all purchases. To get this reward you need to have savings at Fidelity — a Section 529 account for college, an IRA or a brokerage account. No problem there. The minimum to open a brokerage account is $2,500 and Fidelity is a great place to park money. It holds $3.1 trillion.

Not everyone agrees that this is the best deal. The Fidelity card is just one of nine cited by Consumer Reports in its list of the best in cash rewards offers. William Hardekopf, who runs Lowcards.com, gives the nod to the Chase Freedom Visa, which dishes out $100 as soon as you hit $800 in spending and pays a 5% reward on charges to various rotating categories, such as home improvement or gasoline. But most of the time the Chase card is going to pay back only 1%.

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There are lots of rewards cards with complicated payback formulas. No, thanks. I don’t have the patience to remember to use one card for car washes on the odd-numbered side of the street and another card the rest of the time.

I figure I’ll clear $500 a year on the Fidelity card—tax-free, since it is in effect nothing but a reduction in the price of things I’m buying.

The card represents a curious confluence of Saver America and Spender America. Fidelity comes from the Saver side. It thrives when people do a better job of funding their retirement accounts. It says (without furnishing numbers) that the proportion of its cards users paying off in full every month is higher than the industry norm.

But Fidelity’s two partners in the deal—Amex, which handles the merchant side, and FIA Card Services (a Bank of America unit) on the consumer side—are decidedly part of the Spender economy. Card issuers thrive when consumers spend money they don’t have. Then the card companies can hit them up for usurious interest.

All this gouging covers losses from consumers who don’t pay. It also supports a parasitic economy of card marketers, credit scorers, collection agencies, junk-mail printers, letter carriers, financial reform lobbyists and yacht-sailing antitrust lawyers.

I got a taste of the dark side when I applied for the Fidelity card. I have a lot of money at Fidelity, and would have been happy to assign a sliver to collateralize my card limit in full. Fidelity, that is, could have arranged to eliminate credit losses on this product. Instead, it handed off the work of protecting itself from nonpayers to partner FIA.

FIA called to badger me about my credit file. Why was it empty? I was asked. No car loan, no mortgage, no personal card application in decades? Answer: Look, lady, I don’t borrow money, I lend it. Mostly, to insolvents like the U.S. Treasury and the State of New Jersey. Sometimes (I own shares in a Fidelity junk bond fund) to corporations like yours.

Which is the true America, Spender or Saver? Sad to say, spenders have the upper hand here. It’s why we are sooner or later going to be eating China’s dust.

Are you a spender? Well, you get a mortgage interest deduction, which is, when you think about it, a reward not for homeownership but for indebtedness. The government is probably guaranteeing your mortgage, including the part you used to finance a vacation. If you fall behind, your frugal neighbor will be taxed to pay for it all. That’s what has CNBC commentator Rick Santelli so riled up.

Are you a saver? Are you trying to live off the interest on your bank deposits? Thank the Federal Reserve for this: Your yield is somewhere in the neighborhood of 0%.

Savers, your only consolation these days is that 2% return you get off the Fidelity charge card. That, and the hope that Rick Santelli runs for President. He’s got my vote.