Reading (and Understanding) “The Fine Print”

I recently consolidated over $17,000 of credit card debt at 5.99%.  Some of my readers have expressed concern over the fact that the consolidating bank may not have my best interests in mind - they could pull shenanigans such as suddenly increasing my interest rate or charging an obscene balance transfer fee.  How can I be sure that I’m not going to end up in a worse place than where I started?

Fear not, dear readers, for I am a master at interpreting The Fine Print!

How do I get off calling myself an expert of that which has alluded so many?  Countless people have failed, as evidenced by our current market conditions: from sub-prime adjustable rate borrowers to credit card holders who couldn’t cut it in the at the arbitrage game, The Fine Print has proven to be difficult to navigate, to say the least.  How dare someone with the financial recklessness I have demonstrated in the past claim to have conquerored The Fine Print?

Because I, BankerGirl, have been a creator of The Fine Print.

Before I came into my current role as a portfolio manager, I was a product developer at a major US financial services firm.  My responsibilities included creating new bank products and managing changes and enhancements to existing product lines. 

Product changes in banking are often made in response to the competitive landscape.  For example: Ten years ago, very few banks were offering a free, interest-bearing checking account. Now nearly every bank has at least one. To offset the cost of giving something away for nothing (the account itself - which has considerable origination and monthly operational costs - plus the interest paid on the account balance), the bank must make up the loss somewhere else in order to make money. 

My job was to keep the bank profitable by finding ways to make up the income lost by giving more of our products and services away for free.  The following is a list of just a few things I had a hand in during my tenure:

  • Enacting monthly minimum balance requirements
  • Implementing Reg D fees
  • Tiering money markets and savings accounts (to pay higher rates to customers with the highest balances and low rates to the small ones)
  • Setting relationship pricing rules (waiving or charging fees based on global customer relationship)

I was also involved in many proprietary changes that I cannot mention here, but you get the idea.  These “features,” as we like to call them, are the bane of a financial blogger’s existence, the kind of stuff you, a financial blog reader, are advised to avoid at all costs.  If you play by the rules of the account, you can do just that.

Which brings me back to that credit card consolidation loan.  I receive countless credit card offers with balance transfer “features” in the mail every week - why did I choose the one I did?  

  1. The 5.99% APR is fixed for life on the balances I transferred.  The Fine Print reads (emphasis is mine): “We will not increase your Special Transfer APR on balances transferred with this application for any reason for the life of the balances transferred.”
  2. No transfer fee (I recently received an “introductory” offer at 3.99% with a 5% transfer fee on all balances - that would have added over $850 to my existing debt - no thank you!)
  3. No annual fee applies to balance transfers

It’s a good deal for me, but the interest rate on this loan is below the prime rate, so how does the bank make money on this transaction?

  1. The APR on all purchases is 11.9%, the cash advance APR is 22.9%, and the default rate APR is a whopping 27.65%.  The Fine Print indicates: These rates do not apply to the transferred balances and can be changed at any time.
  2. Late payment fee (applied to all balances) = $39
  3. Payments are applied in the way that most benefits the bank.  According to The Fine Print:  “We will apply your payment to pay off lower-rate balances before paying off higher-rate balance.”

Clearly, the third point here is the kicker.  Translation: if I were to use the card for any purchase or cash advance, they are going to apply my monthly payments to the balance transfer debt at 5.99% before applying it to my purchase debt at 11.9%. 

This is a really smart (and sneaky) on behalf of the bank.  They know my credit history - so they are well aware that I’ve been carrying credit card balances totaling over $15k for the last 18 months.  Based on that, they can conclude (correctly) that it’s highly unlikely that I am able to pay off the balances I transfer to them in just a month or two. 

As long as I have that 5.99% transfer debt outstanding, they will be earning 11.9% on all purchases I make with my pretty new credit card.  Again, based on what they know thanks to the credit bureau (that I having a history of using all my cards, using most of my available credit lines, and only paying 20% - 50% over the required minimum payment every month), they can assume that I will use that card over and over again - meaning that 11.9% debt will likely hang out there, growing, earning them interest income, for years and years.  And that rate can reset at any time.  Today it’s 11.9% - tomorrow it could be 21.9% -making my balance transfer transaction even more profitable for the bank.

That is why I cut up that pretty new card immediately upon receipt.  In order to not to end up in a worse position than when I began, I need to work my plan and stay on track.  The point of this consolidation loan is to pay off my credit card balances in full, not find exciting new ways to stay in debt forever. 

Stumble it!

14 Responses to “Reading (and Understanding) “The Fine Print””

  1. Red Says:

    Thanks for this post, a pf blogger actually IN the industry that many are trying to understand is quite helpful.

    This post reminds me of Cass Sunstien’s book “Worst Case Scenarios”, where he discusses the fact that human nature is to view things as either inherently “safe” or “Dangerous”, without much middle ground. Fear of Flying after 9/11 vs. Driving despite the much higher accident occurrence on the road is a good example.

    Most are fearful of fine print and view consolidations as inherently Dangerous. It’s interesting to see that by understanding how the bank intends to make money and avoiding those situations, consolidation can be a useful tool.

  2. Becky Says:

    Excellent post. I’ve never carried a credit card balance, so I’ve never had to deal with this, but I have heard about the exact scenario you’re talking about. I wonder what percentage of the time the credit card company wins this “game”? I’m glad you get to disappoint them!

  3. Michael Says:

    Yup. Mastering The Fine Print comes in mighty helpful when you’re navigating these waters.

    Not everyone’s cut out for it, of course, which is why the credit-card companies aren’t going broke (well, not from credit cards, at least).

    Oh … and your writing is quite good, by the way!

  4. Heidi Says:

    @ Red - I have heard of Sunstien’s book, but haven’t picked it up yet - -thanks for the tip.

    @ Becky - I am taking a lot of personal satisfaction in knowing that I’m finally benefiting from the game from once.

    @Michael - that’s exactly why the credit card firms aren’t going broke. Only 30% of Americans carry credit card balances, but that third is so profitable they are supporting an entire industry. For every person that gets it together, there is some college freshmen just waiting to fall into the trap.

  5. Mrs. Micah Says:

    Ah, so you’re the one. ;)

    My dad works at a credit card company, so he’s helped me navigate some of this too (even though he was a software engineer, they made him do 3 hours customer service each month to stay in touch with the bank’s culture…).

    I think the biggest place they get you is on paying off the lowest interest first. Or people don’t realize that the new low rates is just for balance transfers.

    I think highlighting the important parts in the TOS might be a good way to go when signing up for something.

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  9. Dividends4Life Says:

    Interesting post! Keep attacking that debt, eventually you will win. Thanks for sharing your experience.

    Best Wishes,
    D4L

  10. fathersez Says:

    I, too, turned down a loan which promised a fixed rate for the loan term in its ads.

    But the legal documents gave them the right to increase rates at their sole discretion. But no statements on reduction.

    This was really ridiculous as the promised fixed rate was the only reason why I went through the hassle of aplying in the first place.

    I am waiting for the day, when borrowers of the world will unite and bring these wordsmith banks to book.

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  13. Mrs. Micah Says:

    And P.S. Stumbled! :)

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