March
29, 2006: Discovering the Latest Deception
By White Russian
The old news is that credit card companies are on a never-ending quest to separate you from your money. Their goal is to get you to borrow enough money so that you will need an inordinate amount of time to pay it back and you will thus be locked in to paying interest to them every month. These companies have used a variety of tactics to suck people in, the most popular being the low introductory interest rate if you transfer a balance from a different card. The problem with the introductory rate has been that once the introductory period has passed, you most likely still have a large balance that is now subject to a higher, less appealing interest rate. The other gotcha about the introductory rate is that if you are late on any payment, you immediately lose the special rate. At the point that the introductory rate expires, the choice is to either continue with the higher rate or transfer the balance to yet another card with an introductory offer.
In trying to get you to sign up, there is fierce competition for your business. Special incentives, like frequent flier miles or cash back, or longer introductory periods coupled with lower rates, are ways to get you to choose one card over another. The credit card companies are constantly looking for new ways to suck you in as the competition escalates and as more and more consumers learn the little tricks the credit card companies are using.
Which
leads to the latest deceptive tactic. It comes from the Discover card and
their enticing offer of “0% APR FOR LIFE* on transferred balances!”
It sounds great. Where else can you get 0% for the life of the loan? This
would eliminate the card hopping game where a balance is transferred from
card to card as special rates expire. But the gotcha is all contained in the
little asterisk after 0% APR FOR LIFE, which is explained on the back of the
application. In the section that is printed at regular sized print, the following
convoluted explanation is given for balance transfers:
“Balance Transfers: 0% until the last day of the billing period ending during December 2006*; then rate may be extended until the last day of the billing period until the balance is paid off* if the Required Transactions are made during each immediately preceding billing period beginning with the billing period during which the special rate expires; then the standard APR for purchases.”
To figure out what the people at Discover really mean, look at this portion of the fine print under the “Introductory/Special APR Offers” section (this is also the only place to find out what “Required Transactions” are):
“…You may extend the application of the special rate if you make 2 purchase/cash advance transactions (“Required Transactions”), each billing period beginning with the billing period during which the special rate expires. You will continue to receive the special rate through the last day of each billing period until the balance of your balance transfers under this offer are paid off, provided that you have made the Required Transactions during the immediately preceding billing period and these transactions are posted to your account by your statement closing date in that billing period. If the Required Transactions are not posted by that date, the special rate will permanently terminate and the APR for purchases will apply…”
This means that in order to maintain your 0% APR on your balance transfer, you must make two purchases per month on your card. But it is not just any time in the month – the two purchases must post to your account by the statement closing date. Even so, having to make two purchases a month to maintain a 0% rate might not be that bad a deal, but look at the fine print covering “Payment Allocation”:
“We apply payments and credits to balances with low introductory/special APRs (such as special balance transfer and purchase APRs) prior to balances with standard APRs. Therefore, your savings will be reduced by making additional transactions or having balances that are subject to standard APRs. In addition, the length of time the Introductory/special APRs will apply to your account may be reduced by the amount of your payments.”
Basically this means that every month those purchases you make on your new Discover card to maintain the special rate for the balance transfer will continue to add up and will not be paid off until you pay off the transfer first. Your standard rate for purchases (10.99%) will be applied to all of those purchases and your payments will be used only to pay off the balance transfer. So while you may have a great 0% rate on that balance you transferred, you are paying 10.99% on an amount that will only continue to grow and will never decrease as long as you have a balance remaining from the transfer. And if you have a cash advance, that amount will be the last to be paid off because it will be at the 20.99% rate for cash advances, meaning the cash advance balance will not decrease, but will continue to increase as the high interest is added to it every month until both your balance transfer and your regular purchases are paid off.
And what happens if your payment happens to be a day late? That information is contained under the asterisk in the fine print in the “*Default Rate” section:
“If you are late making a payment, any introductory/special rates terminate and all your APRs will increase to a variable APR not to exceed Prime Rate + 10.99%. If you fail twice to make a required payment when due or if you exceed your account credit limit twice, all your APRs will increase to a variable APR not to exceed the Prime Rate + 15.99%. If three time, all your APRs will increase to a variable APR not to exceed the Prime Rate + 19.99%. For billing periods ending after 4/1/06, each time you are late making a payment 5 percentage points will be added to your purchase APR (not to exceed 28.99%), and any other rates will change to be the same rate and type (fixed or variable) as the new purchase APR. However, if any rate exceeds the applicable Default Rate described in this paragraph, it will not change.”
As with all of their other explanations, this paragraph is overly convoluted. The bottom line is that if you are one day late you will lose the 0% rate and all of your balances will go to a new 15.99% purchase rate. You can at least rest assured that those cash advance balances will retain their 20.99% rate (until they manage to raise your purchases rate above that).
And one more thing – there is a 3% balance transfer transaction fee for each balance transfer made under this offer (minimum $5, maximum $50). And who knows what rate that fee will be at. Will it be added to the balance transfer amount? Or will it be under the purchases rate? Or will it go under a rate similar to the cash advance rate? The fine print doesn’t say, which means you will probably be paying interest on that transaction fee for a very long time.
So how does that 0% offer sound now?