A letter arrives for my husband from Barclaycard. It wonders if we would "like a helping hand this festive season". If so, Barclaycard would like to be that helping hand, whether we're "looking for last minute stocking fillers, preparing a festive feast" or we just "need cash for an unexpected event".
All we need to do is call with our card and the account number/sort code of the account we want the money paid into, and all our seasonal financial problems will be over. What's more, there'll be no interest to pay: the transfer comes "at 0%".
Sounds nice, doesn't it? It isn't. First there is a "fee" of 1.9%. So borrow £2,500 and you will incur an immediate cost of £47.50. Let's say you really do just want a short-term loan, and you pay the £2,500 back after 30 days. You paid an effective annualised interest rate of just over 25%. Pay it back in two weeks, and that annualised rate is 57%. It isn't quite payday-lender land but, it isn't exactly spelt out in our "helping hand" letter, either.
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The good news is that assuming you don't pay the money back until the end of the promotional period, September 2015, you really will be borrowing money at an annual rate of well under 2%. That's nice.
But for many people it isn't so nice. If you don't pay the money back before next September (perhaps with a direct debit set up to clear the debt), the odds are you won't pay it back next September either. So now you have exactly what credit card companies like you to have long-term debt you have to pay back at short-term rates. According to the Office for National Statistics, about 25% of us have an outstanding balance on a credit card. How much of that do you think is at 0%?
There are endless variations of this trick in the credit card market, and not just for cash transfers. Other 0% deals allow you to transfer card balances from elsewhere or sign up to a period in which all new spending comes interest free. The differences come in the length of the promotional period, the fees to transfer and the split between transfers and new purchases.
But the net effect is the same. Savvy, numerate and reasonably well-off people get to borrow money over longish periods for very little. Junior investment bankers like to use 0% credit cards to fund their lifestyles between bonuses, for example. Not so savvy, numerate or well-off people get to foot the bill. And clearly there are more than enough of the latter to satisfy the sales managers at the likes of Barclaycard: they wouldn't do it if it didn't work.
This isn't the only way rip-off credit hits the financially illiterate at Christmas, of course. MoneyWeek readers are unlikely to spend much time engaging with "rent to own" company BrightHouse (one of several such companies being looked at as part of an inquiry by the All Party Parliamentary Group on debt and personal finance). But if you ever wonder how the UK can have both one of the world's most generous welfare states sitting alongside endless complaints about poverty and food banks, it is here that you will find part of the answer.
BrightHouse sells everything from sofas to TVs online and in 270 stores across the UK in financing deals that allow you to meet your bills with low weekly fees (think £10 a week) over many, many weeks (think at least 100). This doesn't come cheap.
Let's look at the Sony PlayStation 4. You can get one of these at BrightHouse for a total of £1,300. The basic price which includes the thing itself, a "bundle" of various games and an insurance product comes to £636.96. The rest (£663) is the interest charged on that. Go to Amazon and you can have the PlayStation for £309 and the same games for around £65. A three-year extended warranty comes to another £70 tops. So if you bought all the parts of the product elsewhere you'd be spending not £637 on it but £444.
This is the bit that is particularly irritating. It isn't just the interest, it's the fact that the price appears to be oddly inflated in the first place. Look at it like that and the effective financing cost of the PlayStation is not £663 but £856 and the effective interest rate payable by anyone lunatic enough to use the site to buy one is well over 70%.
The PlayStation isn't a one off. Buy a Hotpoint Ultima 9kg washing machine on Amazon and it'll cost you £345 (guaranteed for one year, but if you feel you must have extra insurance you can get it for around £40). Buy one from BrightHouse and the initial price is over £300 more at £731.51. After interest costs it is £1,404. Yup. That's £1,404 for a not-very-well-reviewed washing machine. You could get a top-of-the-range Miele for that.
This is out of Barclaycard's league, and perfectly reputable seeming credit card companies won't much like being mentioned in the same article as not-so-reputable rent-to-own firms. But the truth is that the tricks they use to sell their products aren't that different they both work to make things that are expensive in the long term look cheap in the short term.
A few weeks ago Tracey McDermott, head of enforcement at the Financial Conduct Authority, said that she'd like to see a "cultural shift" among financial companies in the UK rather like the one that has taken place around drink-driving. People used to avoid doing it because getting caught was such a nightmare. Now they don't do it because they see it as a "moral issue". Who wants to take the risk of ruining other people's lives by having an accident after three glasses of pink prosecco? How, she asked, can the financial world make the same shift to a world "where people more often make the right decision instinctively" for ethical reasons: "because they know that is what is valued by their peers, their colleagues and their firms?"
There's no easy answer to this one it took a generation with drink-driving. But a quick read of the letters from your credit card company or a visit to the BrightHouse website should make it clear that we certainly won't have figured it out in time for Christmas.
This article was first published in the Financial Times
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