Capital One Financial Corp. may be lauded for its rapid growth and low- rate credit card marketing strategy, but at a recent ceremony in Washington it won the financial services award for the most misleading advertising of 1995.
At the Harlan Page Hubbard Lemon Awards, sponsored by the Center for Science in the Public Interest , Capital One was blasted for its direct mail solicitation offering consumers a reduction in their minimum monthly payments - for a $19.95 fee.
The "Check It Out" offer reduces consumers' minimum monthly payments from 3% of their total bill to 2%, by checking a box on their payment stub. "With this 1% drop, and an outstanding balance of $2,500, you could have $25 more in your pocket each month! That's $300 over the course of a year," the advertisement said.
Ruth Susswein, executive director of Bankcard Holders of America, a consumer advocacy group, accused the issuer of "coming up with the ultimate wolf-in-sheep's clothing advertisement.
"Consumers are led to believe that they'll have extra money in their pocket," she said. They will for the first month, but over the next 20 years they'll have a lot less in their pockets, she said.
According to Ms. Susswein's calculations, a $2,500 debt, paying the 3% minimum monthly payment at 18% interest, would take 15 years to pay off and would cost $2,299 in interest. With the 1-point drop in minimum monthly payments, it would cost an extra $4,132 in interest charges and would take an extra 19 years and seven months to pay.
Ms. Susswein said the offer is "appalling" and "irresponsible."
Another consumer advocate, Robert B. McKinley, president of RAM Research Group, said in CardTrak, a monthly newsletter, that "only consumers with bird brains could fall for that one." He added, "The real kick in the face is Capital One requires you to pay $19.95 for being ripped off big time."
Diana Sun, a Capital One spokeswoman, said the offer was tested on a small number of cardholders and was designed to give consumers greater flexibility. "We're not forcing anyone to do anything. If it's a bad offer, just throw it away."
With a customer base that increased from one million in 1988 to six million in the third quarter of 1995, and $10.2 in receivables, she added, "We must be doing something right."
She pointed out the industry average for minimum payments hovers at about 2% anyway.
"The fact that (Capital One) is typically at 3% is commendable," said Ms. Susswein. "The problem with this (ad) is that it leads people to believe they're getting a good deal when in fact they're adding decades to their payments."
She said the offer might appeal to the many consumers who don't understand how interest is calculated.
Capital One has been criticized for other offers, including a solicitation for a $1,000 credit line, a fixed 19.8% interest rate, and a fee of $39.
Mr. McKinley said the offers were not surprising. "After all, this is the same issuer that will jack up your interest rate to 24.9% for the slightest transgression of the cardholder agreement or for piling up too much debt elsewhere."
