Credit Card Company Gets You to Loan Them Money--For Free

You've gotta hand it to Department Stores National Bank. They've clearly decided to be the industry standard-bearer for dirty tricks in the post-Credit Reform era. And they're good. Really good.

Ron Koblin, who has a Bloomingdale's card issued by Department Stores (the same company that sent me my new 703.8% Macy's card), did a double-take when he got his bill. The company was charging him interest before any interest was due.

The way they'd designed the statement, it appeared that his balance was $629.76. But, if you looked closely, you'd realize that it included $12.96 in interest charges that would only be due if Koblin didn't pay the balance on time. Koblin always pays the balance on time, so paying the "new balance" listed on the bill would have caused Koblin to overpay by that amount.

Koblin didn't make that mistake. He paid the amount he charged, deducting the unearned interest from the bill. But he figures most people just pay the bill without looking, which effectively causes them to lend the bank money--for free.

If yours truly, a 25-year-personal-finance veteran, is any indication, he's right. My Macy's card did the same thing. And I paid the $2 "minimum interest" fee with the bill, causing me to have a $2 credit balance on my next statement.

The company will deduct your credit balance from your next charge, or send you a refund, if you call and ask for it. But who's going to ask for a $2 check? More likely, Koblin points out, you and I will lend Department Stores (a subsidiary of Citibank) millions of dollars through our inadvertently created "credit balances." And that could prove a great source of profit for the bank, since they're loaning money to you at 24.5% and you're loaning money to them for free.

I figure the way to get a little revenge is to ask for your $2 check. That could make this a really costly loan for Department Stores just because of the mailing expense.

Here's how it works: I pay the whole balance on the bill, effectively loaning Department Stores $2 for one month. I immediately ask them to refund my credit balance and they have to spend 44 cents on first class postage, not to mention check processing costs, to get it back to me.

If I'm doing the math right, that works out to a 264% annual rate. Citibank's spokesman explained that the formula for my 703.8% rate was: 12 (finance charge/average daily balance). So for my little transaction, I feed the 0.44 cent stamp cost into the "finance charge" portion of the calculation; use $2.00 as their average daily balance and get 22%. Then I multiply that result by 12 months to get an annual percentage rate of $264%.

At that rate, I'm willing to loan a big bank a few bucks.