Predatory Lending on the Prowl

December 19th, 2012
in econ_news, syndication

Econintersect: The staff at Global Economic Intersection continues to find predators in the junk email file.  Today (Tuesday, 18 December 2012) the activity of concern is fostered by a company named Cerulean.


Follow up:

Here is the email received today:

Click on image for enlargement.

The following is information shown on the Cerulean website:


Credit card expert Beverly Harzog has reviewed the Cerulean Discover card on her website.  One of the first things revealed is that Discover has nothing to do with the issuance of the card.  The only connection with Discover is that is the payment network that processes transactions when the card is used.  Discover doesn't even provide services for the card after the initial transaction is creditied and forwarded.

Some of the facts about this card that Harzog identifies:

1. The card is aimed at those with badly damaged credit and some of the cards will issued only as secured credit cards.  (The applicant makes a payment and then draws against the deposit, much the same as a prepaid gift card.)

2. As indicated on the Cerulian website, there is no application fee.  But after that:

  • Annual fee $75 per year.
  • Additional card fee.
  • Monthly maintenance fee paid with a $144 annual payment, waived the first year.
  • Cash advance fee is 5%.
  • Credit limit is $300 ($225 after the $75 annual fee is subtracted).
  • The $300 credit limit cannot be increased for at least one year.  After that there is a $30 fee dor each $100 credit limit increase.

Econintersect has developed the following hypothetical to show how mismanagement can create a nightmare with this card.

Assume that the applicatant is "lucky" enough to obtain the card with a $300 (oh yeah, that's really $225) credit limit.  Further assume that the applicant maxes the card in the first month and then makes minimum payments (assume an industry typical 2%).  And add the 29.9% annual rate interest to the unpaid balance each month.  The following table shows the statement for the account over the first 42 months.


After 42 months this hypothetical card holder will have paid $557.58 for the $225 spent and have a current account balance of $1,299.44.  The calulations can be continued.  After five years the payments will total $1,134.43 and the "remaining" balance will be $1,793.69.  After ten years total payments = $5,014.63 and balance outstanding = $4,513.87!

Of course, this is not how the card should be used, but how many people who get this card will realize that?  If there is a hypothetical customer who does follow this example it is very unlikely that they will keep making payments for many years.  But if payments are made for 27 months the $225 is recovered with $13.02 to spare.  After 36 months the principal is returned plus interset payments totaling $180.74.  This is an annual return of 21.7% compounded annually.  After 42 months the annually compound return is 29.6%; and after five years, 43.3%.

John Lounsbury


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