Wednesday, March 10, 2010

First Premier and Interest Rate Bloat

Somehow I missed the news that First Premier Bank has decided that what the world needs now is a credit card charging interest at an Annual Percentage Rate of 79.9 percent.

But so far as I can tell, nobody pointed out that this stated rate is almost certainly an understatement. I assume we are talking "Annual Percentage Rate" (APR) here, as mandated by the Consumer Credit Protection Act. The catch is that APR systematically understates the real rate. Under APR, you quote your rate as if you were collecting interest only once a year. But APR allows you to compound more frequently--monthly, weekly, maybe even daily. If you get your money back early, you are getting an effective higher rate of return.

Lots of credit cards charge "daily" interest, often on the assumption of a 360-day year. If that isw what First Premier is doing, then the true effective rate is 122 percent. That is:

((1 + (.799 / 360))^360) - 1 = 1.22134894

As the guy said when he was tarred and feathered and run out of town on a rail -- "if it wasn't for the honor of the thing, I would just as well have walked."

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