If you recall, I told you I got engaged. I that post I also talked about how I paid for the engagement ring (and wedding ring). I was offered 10% off if I took advantage of their credit card program. Not only would I get 10% off, but I could go 6 months without making payments or accruing interest. Normally I prefer to keep things simple and just pay it all up front, but I was feeling adventurous and we all learn by doing, so I bit. Everything went off without a hitch. I didn’t understand how the credit company would make any money, until now.
My first payment is due in April, I intend to pay off everything in March just to be safe though. I’m getting monthly statements which say there is no payment due, and no interest has accrued. But that isn’t entirely true. While nothing has technically accrued, interest is accruing on the back end. If I don’t have the ring paid in full by April, they will hit me with all that back end interest, which will total almost $500 by then based on my calculations. That’s when I learned how they make money. They know that most people won’t have the money ready by then. The credit company backing this card knows that most of us won’t pay it off by April, so they will make money then. Why do they know this?
Let’s say the ring I purchased was $8,000 (it’s not) and I was planning on paying cash. I instead take advantage of the deal and finance half of the ring. Now in my mind I have $4,000 sitting around that I didn’t think I would have. So I bought me and The Sheconomist a new LCD TV and paid for the honeymoon to Turkmenistan. All of a sudden April rolls around and I don’t have $4,000 anymore. I get hit with the “secretly” accrued interest and now I owe much more. Since I don’t have the money right now it takes me another 2 years to pay off the damn thing, all the while another $2,000 in interest accrues. What would have cost my $8,000, instead cost me $10,000.
This is brilliant from the perspective of the credit company. However, even though the statement shows what interest is secretly accruing, I feel this is a deceptive practice. I used to think that any business that can make money legally based on the stupidity of others should be allowed to exist. But now I frown upon them. This doesn’t mean I think it should be illegal, I just want my fellow people to be aware of how this works. If we all know and exploit the system, then they will stop offering it.
A few other notes about this system:
Do not take the jewelry store’s word on it. I asked the super-helpful lady who ordered the ring for me about the accruement (no that isn’t a real word). She insisted interest will start accruing from April, not when I bought it. It’s not that she’s lying, she herself doesn’t understand how this system works.
This is not limited to jewelry. Look at furniture stores. No interest/No payments until 2011? You ask yourself how they make money. By 2011 you’ll owe more than TWICE what you actually paid for the furniture.
Watch for tricks on the payment due date. The really jerky guys will make a due date on a Sunday or holiday, any day for that matter when mail isn’t delivered. Though I still owe nothing, the printed due date on my latest statement is Christmas Day. Miss the payment, more fees and interest.
No Interest/No Payments is not the same as 0% financing. Toyota, GM, Ford, and many other car makers have offered 0% financing at some point. With 0% financing, you make payments from day one. It’s just you don’t accrue interest, and so each month you only need to pay down principle. 0% is actually great for anything you plan to finance, and it is not some back-end trick.
And finally, No Interest/No Payments is also an excuse for the credit company to charge whatever interest rate they want. They know you won’t pay attention to it for 6 months. I checked my credit recently and I’m in the top tier for my age. I checked with my employer and I would qualify for their best interest rate on any loans as well. So I know I am in good shape. Despite this, the credit company is charging 20.99%.
 By The Weakonomist |
The Weakonomist is the founder of Weakonomics. Clicking the picture of the puppy will tell you more about him. If you like what you're reading consider subscribing to the blog, following him on Twitter, and checking out the related posts below. Please consider a donation if you really enjoy Weakonomics. Also keep in mind that nothing I say can be construed as financial advice. |
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