It would be nice if the media covered the actual scam in these stories….. but they don’t:
Dec. 9 (Bloomberg) — Andrea Allan used a convenience check she received in the mail from JPMorgan Chase & Co. for Home Depot purchases. The check cost her almost $700 in interest and fees when the bank cut her credit limit and wouldn’t honor it.
“Why during this economy would Chase put out checks to people to entice them?” said Allan, a 50-year-old aesthetician in North Hollywood, California, whose credit limit was cut to $1,100 from $3,500 after she received the checks in September. “It feels predatory, not convenient.”
Well yes, that’s inconvenient. What’s worse is that there is no requirement for card issuers to notify you (other than on your statement) when they cut your line back, which can (and sometimes does) lead to this sort of problem.
But that’s not the real scam in these “convenience” checks.
The real scam is found in the typical pitch enclosed with them, like the one I got from Discover a couple weeks ago.
“0% if paid off by March 31st 2010.”
Sounds good, right?
Well, no, it’s not, and it’s not 0% either.
From the date I received the checks there was roughly four months of “zero interest.” So far so good.
But in the fine print was disclosed that there was an immediate 5% “convenience fee” added to the balance when I wrote the check!
Let’s see – there are 12 months in a year, and I got four months for 5% right up front, and if I don’t pay it off, I start getting charged interest.
So what was the actual interest rate on that loan again?
If I wrote the check and then paid it off in one month, I’d pay 5% for holding the money for one month. If I did this 12 times I’d pay 5% 12 times, or an annualized 60% interest rate!
The longer I hold the money, of course, the lower the effective rate – which is why they cut that off after March. If I hold it for the full four months then I pay “only” an effective 15% interest rate. That’s not awful (unless you consider that Discover can borrow from The Fed at zero!) but it is not “zero interest.”
But of course when I get the check I might not cash it instantly. Let’s say I spent it a month later on Christmas presents.
Well then my “effective interest rate”, since the zero period expires in March, would be 20%.
See how these clowns get you?
What’s missing is a clear, one-page description along with some simple examples, such as the person who holds the money for only one month, for two, for three, and for the maximum possible four before their ordinary interest rate kicks in.
That’s a very nice scam boys and girls, but I won’t be biting on it, you shouldn’t bite on it, and if we had anything approaching an honest regulator in this country this sort of “trick ’em and screw ’em with fancy games” practice would be absolutely banned.