HOW CAN NOTHING BE SOMETHING? On the surface it may defy logic, but no number carries more weight than zero. It can be the cause for a joyous occasion, such as the number of days until your retirement or the amount owed on your mortgage. Or, it can be a cause for great concern, such as your latest exam score or the balance in your checking account. In the days leading up to the creation of the number zero, philosophers pondered the question, How can nothing be something? This question is just as relevant now as it was then when considering zero s most popular use, err, abuse in perpetrating an unlimited number of sins of omission through grand promises such as zero percent interest, zero financing and zero payments, to name a few. But what does zero really mean? This first part of a two-part series seeks to uncover the truth behind the promise of zero as it pertains to credit cards, payday loans and pawnbrokers. The second part in the series covers the topics of the rent-to-own industry, refund anticipation loans and car loans. CREDIT CARDS Credit cards have their pros and cons, for instance: pro - access to funds in emergencies; con - increased exposure to identity theft. But the credit card s greatest pro or con depending on which side of the transaction you stand is the impulse buy. Businesses long ago realized the benefit of the impulse buy and, accordingly, push hard for the use of retail credit cards. How many times have you seen that big ticket item and decided to purchase it simply because of a zero percent financing store credit card offer for 12-to-18 months? But did you read the fine print? Within it, you ll usually find zero percent is not as clear cut as advertised. In most cases, to get zero percent you must make minimum monthly payments equal to a set percentage of your balance which sometimes is never stated or nearly impossible to find and pay off the balance within a set time period. If you have trouble making your payments, contact your creditors as quickly as possible and ask for more time. Miss one regular payment, or fail to completely repay the total purchase price within the time allotted, and you are faced with paying the interest that has incurred from the original date of purchase, compounded monthly at an astronomical percentage rate usually in the 20-25 percentage arena. Consumers were given more protections against such unfair or deceptive credit card practices with the passage of the Credit Card Accountability, Responsibility, and Disclosure (CARD) Act of 2009. However, these protections do 1
CONSUMER VS. BUSINESS Here are some key protection differences between business and consumer credit cards, as noted by the Pew Safe Credit Cards Project: Consumer Terms cannot change during the first year; after this period, 45 days notice is required and consumers generally may opt out. Existing balances are protected from arbitrary increases. Business Issuers may change any term at any time with little or no notice, including raising rates on existing balances. Consumer Penalty fees must be reasonable and proportional, generally $25 for the first infraction and $35 for additional violations within six months. Fees must not exceed the violation (e.g., the penalty for a $4 over-the-limit transaction must be $4 or less). Over-the-limit fees cannot apply unless the cardholder has opted in. Business Penalty fees are virtually unrestricted. Consumer Any payment amount above the minimum payment due each month must be applied to the highest-rate balance first, thereby reducing interest charges to cardholders. Business Issuers can direct payments first to low-rate balances, such as balance transfers, while interest accrues on higher-rate balances. not apply for business or commercial credit cards. Don t be misled by these cards names, consumers are still at risk with these cards because they can be marketed to nearly everyone regardless of whether the account holder is a large corporation, a small business or an employee. Because they are unregulated, commercial credit cards can have unpredictable pricing structures, hair-trigger penalty interest rates and require individuals to be personally liable for all charges under a business account. According to the Pew Safe Credit Cards Project, one-in-ten credit card offers consumers receive in the mail are for business credit cards. This adds up to more than 10 million offers every month. PAYDAY LOANS If you ve ever been in a money crunch, the prospect of a payday loan can look pretty appealing, especially when you are inundated with endless payday loan promotions, such as: Zero money upfront! Get instant cash to hold you over until your next payday! However, this instant cash can translate into high transaction and interest fees. Those fees are there to hedge bets that you will be unable to pay back the loan on time. By being in your current predicament, payday lenders feel the odds are in their favor you will fall into a money crunch again and be unable to repay to loan when it is due. So, you choose to roll over the loan and are subjected to the payday lender s high fees. Take for instance this example from the Federal Trade Commission (FTC): You go to a payday lender because you need to borrow $100 for two weeks. You write a personal check for $115, with $15 as the fee to borrow the money. The payday lender agrees to hold your check until your next payday. If you budgeted appropriately, when that day comes around, either the lender deposits the check or you redeem it by paying the $115 in cash. But if you find yourself unable to payback the loan, you choose to roll over the loan and are charged $15 more to extend the financing for another 14 days. If you roll over the loan three times, the finance charge would climb to $60 to borrow $100! This translates into an annual percentage rate of 391 percent. 2
There are more affordable options out there. Consider these payday loan alternatives: Seek a small loan from your local credit union or a community-based organization Often, credit unions and community-based organizations will offer short-term loans for small amounts at competitive rates, including small business loans. If you are having trouble making your payments, contact your creditors or loan servicer as quickly as possible and ask for more time Many creditors may be willing to work with you if they see you are acting in good faith. They may offer an extension on your bills, but make sure to find out what the charges would be for that service, such as a late charge, an additional finance charge or a higher interest rate. Make a realistic budget, including your monthly and daily expenditures, and plan, plan, plan Try to avoid unnecessary purchases. The costs of small, everyday items like a cup of coffee add up. At the same time, try to build some savings: small deposits do help. A savings plan, however modest, can help you avoid borrowing for emergencies. Saving the fee on a $300 payday loan for six months, for example, can help you create a buffer against financial emergencies. Borrow only as much as you can pay with your next paycheck and still have enough to make it to the payday that follows. Contact your local consumer credit counseling service if you need help developing a budget or working out a debt repayment plan with creditors Non-profit groups in every state offer credit guidance to consumers for little-to-no costs. You may want to check with your employer, credit union or housing authority for a list of reputable counseling programs. The bottom line on payday loans: try to find an alternative. Whenever you borrow money, try to limit the amount. Borrow only as much as you can afford to pay with your next paycheck and still have enough to make it to the payday that follows. PAWN BROKERS The precursor to the payday loan, pawn shops set the stage for high interest financing rates on small loans. Typically, the average size of a pawn loan is $75-$100. Fees charged can vary from as low as 12 percent to as high as 300 percent annually. Depending on which state you reside in, there are different laws that set the maximum amount of interest charged on a pawn loan; however, most states allow pawnbrokers to charge an additional monthly service fee as high as 20 percent. 3
The terms of the loan are usually longer (approximately 15-to-30 days). After the loan period has passed, most pawn brokers will implement a 30-to-60 day grace period where customers can still regain their valuables provided they pay back the loan amount plus exorbitant fees and interest tacked on. Because the valuables being held hostage can have high sentimental value, many customers blindly pay those fees to recover their items. YOUR RIGHTS If you find yourself a victim to these zero offers and are unable to climb out, there is always an alternative solution to digging yourself deeper in debt. Work within your rights to come up with a debt collection agreement with your debtors. FTC enforces the Fair Debt Collection Practices Act (FDCPA), which prohibits debt collectors from using abusive, unfair or deceptive practices to collect from you. FDCPA covers personal, family and household debts, including money you owe on a personal credit card account, an auto loan, a medical bill and your mortgage. For more information on your rights, visit FTC s online Debt Collection FAQs page at www.ftc.gov/bcp/edu/pubs/consumer/credit/cre18.shtm. Be sure to read Part Two: What Does Zero Mean?, which seeks to uncover the truth behind the promise of zero as it pertains to the rent-to-own industry, refund anticipation loans and car loans. 4