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By Murray Bourne, 11 Sep 2008

I wrote earlier about a Standard Chartered Bank advert for credit cards, where I was horrified at the effective interest rate being almost twice the advertised rate.

To continue this theme, I want to present you with an ad that offers "interest free cash".

OCBC (Oversea Chinese Banking Corporation) is the 3rd largest Singapore-based bank. In the ad, "GSS" stands for the Great Singapore Sale, held mid-year every year.

There have been similar variants on this ad over the past few months, offering "zero interest transfer" from other credit card accounts and more recently, one that offers "Clear all taxes at one go with NO interest" (also pictured above). The deal - and the fine print - are essentially the same in each case.

"Funds Transfer" means transferring from one debt facility (another bank's credit card) to OCBC's, while "CashWise" means a cash loan.

Notice that there is an asterix on each of the "0% p.a." throughout the ad.

The asterix points to:

What's that? A "fee of 1.5%, 2.5% or 4% of the transferred amount will be imposed". What happened to the "0% p.a."?

Now, let's think about those "fees". A fee of 1.5% for what is actually a 3 month loan works out to be 6% interest p.a. (using simple interest). The 6 month loan works out to be 5% p.a. and the 9 month loan is actually at 5.33% p.a.

Presumably the agreed amount (your taxes, the transfer from other credit cards, or the amoutn you want to borrow) and the "Fee" is charged against your credit card and you need to pay it off in the stipulated period. (I say "presumably" because the ad does not have a clear statement about how it works.)

But the kicker in this ad is the final sentence. "Prevailing interest rate of 24% p.a. will apply after the promotional period". How can banks charge such outrageous credit card interest rates, when they pay a miserly 1% (or less) on ordinary deposit accounts? And of course, they want you to default (by forgetting to pay, or whatever), so then they can charge you 24% and various fees.

In the case of the 12-month Cashwise offer, we have the following:

So the "0% p.a." interest in this case has become 5% p.a.

## Let's Try to be Fair

Fairness point #1: Currently in Singapore, inflation is running at around 7%, so if you can get credit at anything less than that, you are possibly better off.

Fairness point #2: The bank is not trying to hide the fee. When you get to the application form, it has:

## Would you like fries with that?

Here's the up-selling bit, where it makes it look like a good idea to roll everything into your OCBC credit card:

Once again, they want you to have a huge debt with them, since it is in their interest to do so.

## The Fine Print

Here's some things you shouldn't miss:

The part that says "at a rate as determined by the Bank at its discretion" is a concern. Presumably they are talking about the fees discussed above, but what if this is actually another fee? They don't call the earlier fees "processing fees", so it could be another fee.

So if you try to pay it off early, you'll get whacked with a $100 fee. In this one, the "finance charges, interest and fees" will be huge compared to the loan you have taken out. the "prevailing rate" is 24% p.a., of course. ## The MP3 Offer - a lemon? The Le-MON offer seems pretty good at first glance, but let's look closer. These are the (vague) specs: What does "up to 1GB memory" mean? Will you get the 1GB version if you sign up for this deal? Or something much lower? Some finer print on this offer: OK, so you need to borrow$8000 or more to get this deal. For CashWise, you need to pay 5% "fee", which is $400 for the minimum loan of$8000.

It is not possible to determine the retail cost for the Le-MON MP3 player (since no model number is given, and the vague "up to 1GB" doesn't help). But let's say it is in the range of $100 to$150. I guess it's a good offer, but you only need to default on your credit card payments and have the 24% interest kick in on your \$8000 loan, and you will be considerably worse off.

Also, they have "the eligibility of each customer to receive a gift shall be determined at the absolute discretion of OCBC Bank". So, if I look ugly, or the gift giver is having a bad day, I don't get one? And there is always the "first 200 customers" part that they could potentially hide behind if they decide not to keep giving this gift.

## Conclusion

Before signing up for anything like this, read the fine print and make sure you know what is going to happen if you default (hey, it's easy to forget to pay, or maybe you have other large expenses in a particular month.)

I believe the promotion is misleading. I wouldn't mind if they had "transfer your debt at a low interest rate", at least that would be more accurate.

And finally, if you need to pay your taxes using a credit card, there is something wrong with the way you are running your finances. The melt-down in the US (and other countries where asset prices soared due to cheap credit) is a result of banks and customers signing up to things that they didn't understand and couldn't afford.

As I repeatedly say, be careful what you sign and don't be afraid of the math.

1. mathmom says:

If you're smart and careful, you can use certain "interest-free" promotions to good effect to get past tight cash-flow situations without digging into savings, or even just to earn some piddling interest on your savings for a while before paying off whatever it was. We do this from time to time, but are careful to make sure there are no hidden fees, and I leave myself multiple electronic reminders to make sure the debt gets paid off on time, of else often the outrageous interest rate gets applied *retroactively*. So far we haven't been burned.

One more thing to watch out for -- if you take a 0% promotion on a credit card, you probably have to stop using it for other purchases until it's paid off -- you can't pay off the new purchases in full and just carry the 0% balance; the new purchase will be at 24% or whatever it is, and any payment you make will go toward the 0% balance, not the 24% balance! (We even paid our taxes this way once, but that was a special situation of being at the end of our graduate degrees and knowing that more income would be available shortly!)

2. Credit cards and maths « garysmathsblog says:

[...] then check another misleading credit card ad which advertises a 0% p.a.*. Notice it has an asterisk… and the info in the asterisk can [...]

3. Donald says:

Avoid Wells Fargo's 48 month free interest for Trane air conditioners. They bill the interest to the contractor for installation of Trane HVAC units and the contractor passes that along to the buyer. Interest free? No. It comes to 6.67%. That is current (October-November, 2016).

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