Monday, May 23, 2011

Interest Free Credit Cards? Remember P.T. Barnum!

Credit Card companies have a new pitch - "0% Interest on Balance Purchases & Transfers Until XX/1/2012". The idea is to give you credit, with no interest on the outstanding balance for 12 months. And, as an added bonus, the offering company will even take your balance, on which you are being charged 20% from another card, and let you move it, AT NO INTEREST, for the same period. Sounds too good to be true? It is!!

First, all of these offers looked at closely, contain a "nominal" fee for making the balance transfer - like 5% of the amount of the transfer. That is a one time immediate capture fee, meaning they get paid by increasing your balance by that 5%. One could say that it's still a bargain because it's only 5% instead of 20%. However, if you pay the entire balance off in 3 months, you paid a rate of 20% annualized, versus paying the old card 20% balance off in 3 months which has the same effective rate. Well, same rate so you are no worse off than if you kept the old card. WRONG!

That 5% fee get added to your principal balance because it's a fee, not interest. So, instead of paying interest on $5,000 (which is the amount transferred in this example) you pay interest on $5,250. But you might retort and say, "Hey, I am not paying any interest on balance transfers so I was no worse off, and if I keep the money for the year, I am much better off - 0% on $5,250 versus 20% on $5000". Yes, that's true - well sort of true. You will be paying whatever the interest rate is on cash advances on the $250 "fee" which is a cash advance. However, like they say in the infomercials "BUT WAIT, THERE'S MORE!".

If by some chance you do not pay the entire balance, transfers from other cars and purchases made during the "introductory period" ending on XX/1/2012, the entire balance AND DEFERRED INTEREST, the amount of interest that the $5,000 would have earned the card issuer for the entire year, becomes part of the balance and you are subject to the regular interest rate which can be, SURPRISE, 20%! Even if you pay the $5,000 transfer amount back in full, if you don't also pay the $250 "fee" you will be charged an amount equal to the interest on all of the $5,000.

So if the regular rate is 20%, you will now have an additional bill of $1,000, which you will pay 20% for until that is paid in full. Actually, if there is $1.00 outstanding on your bill at the end of the introductory period, you will find your next bill has $1,000 added to the $1.00 that was missed in your previous payment.

Outrageous, but perfectly legal. When the Credit Card Act was passed last year, it took 5 seconds for the card issuers to find a way to keep there profits high. This is one way. Oh, and as an added treat, this scenario applies to most of the retailers, like electronics stores and appliance stores and any "big ticket item" stores - "Buy now and pay no interest for 1 full year!". When that "1 full year" is up, if you haven't paid the balance in full, expect all of that deferred interest to hit you on the bill you get in the 13th month.

The FDIC has a great website that will take you through this and a dozen other ways cards can haunt you now, even more than before.

Look, credit is fine; credit cards are useful and sometimes necessary, especially in emergencies. JUST KNOW THE RULES! Read ALL of the mail - even the stuff that looks like junk mail - there may be a hidden $1,000 charge in that envelope.

Author's Copyright by Richard I. Isacoff, Esq., May 2011

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