Before the financial crisis I, like most Americans, received a lot of credit card offers in the mail. What used to be a steady stream has now slowed to a trickle so I’m paying a little more attention to the occasional “good deal” teaser offer. Last week one of them caught my eye. Capital One offered me a “Platinum” card at 0% APR until June 2010, with purchases and balance transfers included. In their words, “You can transfer up to $30,000. And, you’ll pay no annual fee.”
Sounds really good, right? Well, sort of. If you read further on, you find out that balance transfers are subject to a 3% fee. So that 0% isn’t really 0%. If I were to transfer a balance of $30,000 from another card, that 3% fee would be $900. Ouch!
It’s actually not a bad deal overall, but the lack of transparency hurts consumers, and ultimately the credit industry. Banks and credit card companies use flashy marketing language to get us to sign on the bottom line, but a lot of their profit depends on us not reading the fine print before we sign up. The jumble of annual fees, transfer fees, “convenience fees” (gee, thanks!), late fees and annual interest makes it hard for consumers to calculate the real cost of the transaction. Especially for shorter timeframes, there’s really no difference between interest and fees… both are money out of your pocket, after all.
Another example where fees vs. interest can be confusing is with payday loans and overdraft protection. Payday loans have two-week terms, but their interest rates are rather unhelpfully disclosed as APR (annual percentage rate). If a two-week loan for $100 costs $15, that’s 15% of the principal (assuming you pay it off on time, of course). Compare that to overdraft protection fees, which average about $35, or 35% of the principal (again assuming a $100 overdraft). Banks don’t have to disclose any interest rate information on overdraft fees, but against payday loans (which have to disclose their annual rate) they end up looking pretty expensive.
So always remember to ask how much a loan really costs, including all the fees, instead of just finding out the interest rate.
One Comment
Incentives matter! The credit card companies have to make money, too… If you are looking at these types of offers, you are probably trying to avoid paying 19% or so on a balance on another card…
I agree. Transparency is a must on the part of these companies but don’t you agree that educating yourself on issues like this is equally important?
My motto is “If it sounds to good to be true, it is!”
Thanks for the posting!