How banks give up trust for money

By Felix Salmon
August 11, 2009
Ryan Chittum has a prime example -- himself:

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Interest-free balance transfers are horribly corrosive things which are instrumental in creating an atmosphere of mistrust between retail banks and their customers. Ryan Chittum has a prime example — himself:

My wife recently mixed up my BofA credit card with my BofA check card and went over limit on the credit line by $39. That triggered the clause that ended my free balance transfer on several thousand dollars I had parked in there, sending the APR up to 18 percent. That’s costing us $110 a month in new interest payments.

Now, sure it’s our fault for screwing up the cards (though they look an awful lot a like), but the point is why do these banks let you go over limit anyway? Precisely to gouge you with fees and to get out from under special offers like free transfers. Remember the days when credit cards were rejected? They wised up on that.

It’s anti-consumer.

But here’s the thing: what’s a reasonable amount of annual interest to pay for a $7,000 personal loan? Obviously $0 is too little, and $1,300 is too much. At Bank of America, the rates for a simple personal loan are, um, er, oh. There’s a lovely list there of no fewer than 61 different products and services offered by BofA — but simple unsecured personal loans are nowhere to be found. Bank of America doesn’t want to offer personal loans to its customers, because it can make so much more money off them by offering highly-lucrative and fee-laden alternative products like credit cards and “overdraft protection”.

All of this has culminated in the Spy-vs-Spy dance that is the free balance-transfer offer. A credit-card company — often a bank — sends you a piece of junk direct mail. Like most junk mail, your first instinct is to trash it. So they have to make it really attractive. And the way they do that is by promising you an interest-free loan. Let us lend you $7,000, Mr Chittum! We’d be happy to! And we won’t charge you a penny in interest!

Mr Chittum, of course, is wise to the trick. Most people are, these days. The credit-card company gets you locked in with a high balance of $7,000 which you’re very unlikely to pay off; at some point in the future, it’ll be able to start charging you enormous interest rates (29% is not unheard-of when it comes to credit-card balances; 18%, these days, is pretty much par for the course) on that money. If you’re smart and disciplined and lucky, you might be able to game the system and pay no interest at all on that balance. Bank of America, for its part, does it very best to make you think that you’ll be able to do just that, essentially getting one over on The Man.

But Bank of America has the empirical data on its side; you don’t. Yes, some unknown percentage of people who take the bank up on its free balance-transfer offer will end up paying no money at all in interest. But statistically speaking, those people turn out to be quite profitable for the bank — if they didn’t, the bank wouldn’t be making the offer in the first place. And so Mr Chittum, when he takes the bank up on its offer, is essentially betting that he (and his wife) will be unusually on-the-ball and conscientious when it comes to managing his credit-card debt.

Most people, when they sign up for one of these offers, think that they’ll successfully game the system. But of course most of them are wrong. That’s good for the bank, in the short term. But in the long term it’s bad, since everybody who ends up making a slip and suddenly paying 18% interest — everybody who chooses to play a game which is stacked against them, and loses — ends up hating the bank, accusing it (reasonably enough) of gouging them with fees and being anti-consumer.

There might be a way in which the new Consumer Financial Protection Agency, if it ever gets off the ground, can change this dynamic. There’s been a race to the bottom in retail financial services which has left most banks with very little in the way of reputation and goodwill; with none left to lose, they feel more free than ever to gouge and mislead their customers. Maybe if the CFPA puts the worst practices to an end, then banks might start competing on reputation and honesty. They won’t pretend to offer you $7,000 interest-free, but they also won’t charge you hundreds of dollars a day if you inadvertently buy a few different items on your debit card without having sufficient funds in your account.

For the time being, we’re right not to trust our banks, because given half a chance they will screw us. It would be great to go back to a world where we can start rebuilding a lot of the trust that has been lost. But I won’t believe it until I see it.

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