I used to think that the debt-relief commercials that said things like, “The credit card companies want you to stay in debt forever,” were ridiculous. I still think that many or perhaps all of the “get out of debt for free” programs that they offer are scams, but they are probably not any worse than the scams routinely perpetrated by the credit card companies to begin with.
- Debt Collection Practices & Impropriety
- The Reverse Payment Prioritization Scam
- The Balance Transfer Scam
- The Penalty Rate Scam
- Exploiting Ignorance: Money for Nothing
Last time, I talked about the Reverse Payment Prioritization Scam, wherein the creditor applies payments to balances in the exact opposite order to which any rational person would apply them. The end result is that debtors generally are in debt for longer periods of time and pay far more in interest payments than they otherwise would. A closely related, and perhaps more devious scam is one which I like to call the Balance Transfer Scam. The Balance Transfer Scam works like this:
There are a number of circumstances under which, if debtor is in reasonably good standing the creditor will generally offer any number of incentives, including the option to transfer a balance from another card at a more attractive rate (plus a transfer fee of $50-150 depending on a number of factors).
These circumstances can be summed up: when debtor calls to cancel a card on which balance is outstanding, creditor will always offer a balance transfer as a first line of defense. If a card that has not been used in a while, but on which a balance remains, and is being steadily paid down, the creditor will send balance-transfer or cash advance checks to be used for any reason. These offers are generally accompanied by a teaser interest rate of 4.99% or something relatively low. They might even offer 0% on transfers for six months or a year.
Creditors do this because during that year, outstanding balances continue to accrue 15%, 19% or 23% interest! During this promotional period, all of the payments go towards paying down only that portion of indebtedness that isn’t accruing interest, when it is actually in the debtors best financial interest to apply payments in the opposite priority.
The balance transfer scam is attractive to debtors because of its nominally lower interest rate, and the appearance of consolidation: there is only one bill to pay each month instead of several. Along with transfer fees (which are generally a % of the balance to be transfered) which ensure that these loans are only nominally interest-free, the Balance Transfer Scam works in concert with the Reverse Payment Prioritization Scam.
The point of the Balance Transfer Scam is to turn less-profitable borrowers (i.e., those who pay all or most of their balances each month) into more profitable customers and more dependent borrowers. This scam is really attractive to creditors, because by design, the borrower becomes ever more indebted!