Just when I thought I had seen it all, today’s mail brought a credit card promotion called “Upfront Rewards” from a credit card issuing bank. The promotion offers immediate delivery of a Dell laptop if the applicant agrees to transfer an existing $5,000 balance and “maintain a minimum balance of $3,500 for at least 18 months. Should the balance fall below $3,500 then the card will be charged a flat $600 fee.
An analysis of this promotion suggests that it is not quite the deal it seems to be. Firstly, this Dell laptop (which the promotion calls an $850 value) is going for around $400 on eBay (for a new machine).
So, if you take this deal and your balance falls below $3,500 you would be slapped with a $600 charge in addition to whatever interest you had already paid.
Now, if you are very disciplined and you maintained a $3,500 balance at the current 9.9% rate (although the card rate is “variable” with a rate of 3.49% to the Prime Rate on purchases and 11.99% on cash advances, what happens?
According to my amortization calculations 18 months of interest on a $3,500 balance at 9.9% results in a charge of $280.72 of interest. So the minimum you are paying for this promotion would be $280.72. Of course the issuer is assuming that you will not be so disciplined and will use the card and build up a balance of more than $3,500. In a best case scenario, you would save $100 or so from the eBay cost of a new Dell (slightly used models can be had for less) but you would absorb 18 months of risk for delinquency or early payoff charges. And, of course, in 18 months, your laptop will be worth about $50 if you are lucky.
If you do not pay down your initial $5,000 balance and pay interest on it for 18 months, then your interest cost jumps to $534.12, which, of course, is more than the open market cost of the Dell.
I must say that this promotion got me to open the direct mail piece, even if this is not a deal I could recommend. I will keep my eyes open for the first time I see one of these accounts in a bankruptcy that I file for a client.