Friday, August 31, 2007

The Most Expensive Loan in History

A few days ago I was running my regular Quicken check-up of our finances and I noticed something strange. Our Citibank credit card was showing a $39 late fee as well as finance charges of $43, with both of those fees also showing an immediate reversal. This seemed strange, so I asked my wife about it. Her explanation blew me away:

Apparently, she paid our full balance off as we do every month. However, she paid the bill on the last day of the cycle at a few minutes after 9 PM PDT. Apparently, the billing cycle is calculated according to Eastern Time not to according to our local time zone. The good folks at Citibank, and by good I mean predatory, charged us a total of $82 in late fees and finance charges for supposedly paying our bill 7 minutes late. I think that if you were to calculate the APR on this supposed "7 minute loan" you would find that Citibank tried to charge us the equivalent of 4 million percent per year in interest. My wife, being the take-no-crap fighter that she is, called them up and gave them a good piece of her mind, at which point they relented and reversed this travesty.

Seriously, if you feel that the credit card companies are out to get you, it's probably because they are. Seems we are not alone in our battle against the evil credit card companies. Here is another post on the subject that I came across a few days ago. Jeff of Jethro's World simply escalated the fight until the credit card company (Chase in his case) cried "uncle".

It is good that some of us are fighting back against these predatory practices, but I have to wonder how many people are just paying these fees without a fight? Once again, where is Congress when you actually need them?

1 comment:

Anonymous said...

Thanks for paying attention to the "little" things. We should all do more of that. I received a friendly note from my close associates at Bank of America today (read "falsely friendly form letter"). I usually throw them in the you know what because they are so insultingly impossible to understand, but I decided to read this one. The first good news was that they were raising their default rate - the rate paid by the worst credit risks - to an annual rate of 32.34%. Neither you nor your sharp wife would ever get yourselves in this position, but others of us have for a wide variety of reasons, some of which are not, in fact, indicative of either sexual deviancy or felonious conduct, and the default rate is actually important to us. The credit card companies are not my favorites to begin with, having begun my career decades ago with a large commercial bank and understanding just how slippery they really are. But when you start paying an interest rate of "one-third" (i.e., 33%), you really have to wonder just who you are doing business with.

So I got out my pencil and started calculating what many of us may actually be paying when all of the fees and other practices of these crooks are added up. The late fee of $39, of course, is the most obvious, and its impact declines as the principal of the loan increases. Nevertheless, one ought to ask exactly what a late fee is charged for. After all, the lender is charging you interest for all of those late days, and interest is usually considered to be the cost of using money. So what is the late fee for? It is not for the employee who looks at the books every day to see who is late - we know that is automated. So what cost, for which the lender is not already being paid, does the late fee cover?

Then, of course, there is the practice of charging interest on money that is technically not even borrowed. What do I mean? Well, if you have an outstanding loan balance that is not paid off each month, then every dollar that is added to the balance during the month also incurs interest (at the "one-third" rate, of course), even if you pay enough at the end of the month to not only make your minimum payment on the prior balance but to also pay the full amount that you charged in the current month. Wow, now that's fair! The amount it can add depends on how much is charged relative to the prior balance. Suffice to say that it can add another one-twentieth (5%) easily.

Then there is the penalty fee that you pay just for being their customer. Let's say that a more customer-friendly bank comes along and offers you a lower interest rate. No problem. You just send your bank one of the handy checks that the new lender provides to effect the transfer of the debt to them. Woops, the fee for that is now 3% of the total principal amount transferred. You know the TV add where the banker hops up on a desk, pulls a yellow Halloween mask over his face and yells to the startled bank customers, "Doowwwnnn onnn the floooor!". It's kind of like that. The bank rules are now, don't be late and don't go anywhere! Notice, however, that this fee is referred to as a transaction fee so the naive won't think of it as interest. Oh, they think, it's just a nominal fee to cover the cost of those nice young employees who have to open the mail and record all of these amounts and divide by 365 and so forth. Actually, no. It is a check, just like the ones they write to the butcher. So, if they are transferring, say, $10,000 to a new lender, they will pay $300 to do the same thing their bank charges $0.35 for to pay the butcher. Good deal.

So when I tally all of these cheerful little charges, plus the vigorish on the principal, I could easily be paying the bank an interest rate of "one-half" (50%). Now, granted, we become immune to these things after awhile - the cost of gasoline doubles, but we keep buying gas guzzling cars - but 50% interest, especially for those least able to afford it, is not only outrageous, it is morally wrong. I will pay these crooks off eventually and will never use a credit card again. Debit cards are equally useful and much cheaper.

And if you think it won't happen to you, just wait until those slimy creeps get a credit card in the hands, and name, of your child at college, and your child actually believes their subliminal pitch that, hey, this is really fun and easy! You might learn a lesson the hard way. I am not in favor of artificial limits on interest rates - price is the most effective means of allocating scarce resources known to man - but, if kids can't drink til they are 21, they shouldn't be able to be sold credit cards until then either, at least unless they have a regular income. When credit cards are sold to college kids, the only source of repayment is... you!