By DAVID MOON, Moon Capital Management
The spouse of a Knoxville bank executive recently decided to transfer her
family's bank line of credit to a credit card company that promised no interest
charges on transferred balances for 12 months. She opened a new credit
card account, transferred her existing bank loan to the new account and looked
forward to the free use of that money for a year.
During the first month, she used the new card for routine expenditures,
planning to pay for all of these charges at the end of the month. She
received her first statement, paid the amount of her new charges, plus a bit on
the original transferred balance.
Imagine her surprise when her second statement arrived, showing a bunch of
finance charges. She called the company, explaining that she fully paid
for all of her new purchases. The card company informed her that the fine
print of her card agreement noted that her payments each month would first be
applied to the lowest interest balance on the card, specifically the 'zero
interest' balance they initially transferred onto the card. All of the new
charges each month were charged 21 percent interest. Her monthly payments
would only be applied to these high rate balances after the original 'zero
interest' balance was paid in full. Effectively, using the card caused her
to swap her zero percent interest rate for 21 percent.
She could have achieved the promised free use of her money for a year on the
original transferred balance by never placing any additional charges of the
account. But once she used the new card at her local Pilot station or
Wal-Mart, what seemed too good to be true, was exactly that.
A few years ago, the New York Times published a statistic claiming that
credit card companies mailed 11 billion pre-approved credit card applications to
would-be customers in 1999. That is about 39 applications for every man,
woman and child in this country. For fun, I started saving every credit
card solicitation we received. Our collection quickly grew from a shelf in
the kitchen to a box in the pantry. Within four months, I used a garbage
bag in the garage.
I lost interest in my new hobby within six months, after collecting 240
pieces of mail.
My first reaction was that these credit card companies must be stupid to
waste all that money on postage, paper and envelopes. But then I realized
that it must be us, the consumers, who are lacking in good sense.
Apparently these unsolicited solicitations work; otherwise, why would these
companies continue to spend hundreds of millions of dollars on them each
Zero percent interest. Free frequent flyer miles. Cash back for
each dollar charged. Free cash advances. Transfer your existing
balance. These companies know our hot buttons and can entice us with the
lure of 'something for nothing.'
The fine print is there for a reason. Read it.
David Moon is president of Moon Capital Management, a
Knoxville-based investment management firm. This article
originally appeared in the News Sentinel (Knoxville, TN).