A favorite tactic of the credit-card industry is to offer customers zero-interest rate loans on transferred balances. Now you might think that banks were competing hard to drive down the excessive cost of borrowing incurred by many credit card holders for whom borrowing via their credit card is their best way of obtaining unsecured credit. But you would be wrong. Credit-card issuers offer the zero-interest loans because, (a) they typically charge a 3 or 4 percent service charge off the top, and (b) then include a $35 penalty for a late payment, and then (c), under the fine print of the loan agreement, terminate the promotional rate on the transferred balance, increasing the interest rate on the transferred balance to some exorbitant level in the range of 20 to 30 percent. Most customers, especially if they haven’t tried a balance-transfer before, will not even read the fine print to know that a single late payment will result in a penalty and loss of the promotional rate. But even if they are aware of the fine print, they will almost certainly underestimate the likelihood that they will sooner or later miss an installment-payment deadline. I don’t know whether any studies have looked into the profitability of promotional rates for credit card issuers, but I suspect, given how widespread such offers are, that they are very profitable for credit-card issuers. Information asymmetry strikes again.
Is Finance Parasitic?