If you are a credit card user, you have no doubt received phone calls from your Visa or MasterCard providers offering promotional low interest balance transfers or lines of credit. In almost all cases, these offers are nothing more than a sucker bet to make you fall into the credit card trap. They will dangle the low interest carrot in front of you in hope that you will bite. Once you do, the trap is set.
Normally I avoid traps like these and just tell the caller I am not interested. However, some companies are very persistent in their phone calls. The endless calls from MasterCard was frustrating one of my friends – I’ll call him Tom because he wishes to remain anonymous. Every other week Tom would get a phone call from MasterCard asking if he wish to take advantage of their latest promotional offer that was made just for him and nobody else (does anyone really believe that line?). Finally frustrated he decided to show MasterCard who the real master was.
The offer MasterCard made was a 1.9% balance transfer. The 1.9% interest is good for six months. After that, it goes to 19.8%. There are a couple of repayment options. He can make the minimum payment of 2% of the outstanding balance or $15, whichever is greater. After six months, any balance left over goes to 19.8% interest. Alternatively, he can pay nothing and let the interest accrue for six month, at which time the full balance plus interest is due. This is kind a like those “Do not pay for six month” deals you see at furniture retailers. Here is the kicker, if he does not pay off the full amount after six months, that 1.9% promotional interest becomes 19.8%. In other words, if he misses the due date, it becomes a very expensive loan.
Tom accepted a balance transfer check from the MasterCard provider and took it to his bank. There, he took out a $10,000 cash advance on his Visa card. Then he immediately paid off the cash advance with the MasterCard balance transfer check ($10K was the credit limit on the MasterCard). Unlike normal credit card purchases that have a 30 to 45 days grace period, a cash advance charges interest on the day you withdraw the cash. However, by taking it out and paying it right off, there is no interest charge – at least not until the banks start charging interest by the minute.
What did Tom do with the $10,000? He put it into an Interest Plus saving account at PC Financial. The interest rate on the account is 4% per year, compounded daily. To make things easier to explain I’ll just use simple interest. If Tom leave the money in the account for six months, it will grow to $10,200.00 (it will really be a little bit more because of the compounding). When the MasterCard loan comes due, He will have to pay back $10,095. That leaves him with a net profit of $105 after six months, which may not seem like much but it accomplished two important things.
The first is Tom will not be getting any more phone calls from MasterCard for the next six months. The second is he made MasterCard lose money on him. Maybe when they see they cannot make money off him, they will never call him again (but I doubt it). The sad part is, the little money that MasterCard loses on Tom will be more than made up for by the suckers who fall into these traps. Oh well. At least I can take comfort in knowing that for the next little while, Tom is the master and MasterCard is the slave.
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