When Free Money Isn’t Really Free
By Jeremy C. Wright | Related entries in Credit Cards, Financial ManagementThe gent who writes “You’ve Been Haacked“, a technology blog, recently encountered a telling truth: free money isn’t always free, even when the bank promises you it is. Repeatedly.
His story is located here. In it, he describes what happened:
We received one of those offers where we can take a $10,000 loan for 6 months with no APR. Since we needed a short term loan we thought, “Hey, we’ll take that, use part of it, put the rest in the bank, earn interest on it, then pay it back in 6 months.”
Which, really, sounded like quite a good plan. Take the 10K, invest it, pay off the 10K in 6 months and pocket the difference (somewhere between 500-1000$ most likely).
He even called customer service to make sure everything was above board:
So we called customer service and double checked. We ran through various scenarios including asking,
So if we take this loan, and say make $1000 in purchases using our credit card, at the end of the month, if we only pay $1000 towards our credit card bill, we won’t have to pay interest, right?
The reply?
Yep
So we don’t have to pay the entire balance each month which would include this $10K loan, right?
That’s correct.
Still feeling slightly suspicious, they re-read the offer.
In teeny, tiny print was the following:
By making a balance transfer and/or using these checks, you understand that future payments will be applied to Promotional balances prior to any existing or new regular balances on the account.
It took him a while to figure out what this all meant, but he eventually found the meat of the matter:
So simply put, if we take the loan, and make $1000 in purchases, and then pay $1000 towards our bill, we’ll now have $9000 as an interest free loan and a $1000 balance generating tons of interest.
The lesson? Besides “read the fine print”, the lesson is simple: banks are evil, and free money isn’t always free.
This entry was posted on Thursday, March 31st, 2005 and is filed under Credit Cards, Financial Management. You can follow any responses to this entry through the RSS 2.0 feed. Responses are currently closed, but you can trackback from your own site.
March 31st, 2005 at 11:01 am
i learned that lesson myself with MBNA (the most evil of the evil banks).
March 31st, 2005 at 1:02 pm
Truer words have rarely been spoken. Back in my more carefree [read:stupid] days, MBNA suckered me with this same scheme, which I took advantage of to take care of an unexpected bill. And then to add insult to injury, they arbitrarily set my rate to their Universal Default of 23.4% from a reasonably comfortable 8.99%. No reason; apparently they just wanted more interest off me. Evil is too nice a word, IMO…
March 31st, 2005 at 9:31 pm
First off, let me say that I this is my favorite blog in the world (and I read some good ones). It really speaks to where I am at in my life and provides great, practical advice.
I have a similar story that cost me about $50…not a big deal, but something I didn’t know. Maybe most people do…but I didn’t so I’m going to share. I didn’t pay off my entire eBay credit card (issued through MBNA) one month. I simply didn’t have all the money (minor cash flow problem). No big deal I thought, I’ll just pay the minimum and take the dumb finance charge…it was only around $20. I paid off the rest of the bill shortly.
The problem occured the NEXT MONTH when I was AGAIN charged finance charges on my entire bill. Turns out…it takes a second month for your account to revert back to it’s normal state. You have to pay your bill in full, before the due date, to reinstate your 25-30 day grace period.
Anyway, maybe most people know that…maybe most credit cards don’t work that way…but it took me by surprise. I will definitely be more careful paying off my credit card in full in the future. They hit you up twice for your finance charges!
P.S. As I said before, I love this blog. I’d be up for a partnership/guest column anytime.
April 6th, 2005 at 1:30 pm
The secret to understanding these types of promotional offers is to put yourself in their shoes and figure out how you’re going to screw yourself.
They’re a business, they gotta make some cash, so find the catch in the offer that will mess you up. If you can’t find it, then don’t take the offer because there is always a catch/loophole that will make them money.
April 11th, 2005 at 12:50 pm
Jim, I generally take the same approach. In this case, I thought the catch is that they’ll make money off the large number of people (perhaps majority) who won’t be able to pay off the $10K at the end of the 6-month period (People forget).
I didn’t anticipate the OTHER way they can make money more immediately. In general, my credit card companies don’t make much money off of me (as far as I can tell) because I get rewards and i pay off the balance each month. I thought this was a similar situation.
They’re very clever at trying to screw even savvy people.
November 9th, 2005 at 3:10 am
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November 25th, 2005 at 4:59 am
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