Don't Be Evil

When banking regulators expressed concern about borrowers getting deeper and deeper into credit card debt, the major card-issuing banks increased their minimum payment requirements from two percent to four percent of outstanding balances. But one bank's making a high-profile move in the other direction.Citibank's new "Simplicity" credit card will automatically waive the late fee for customers that use the card during the billing period in question. Essentially, this neuters the requirement for a minimum balance payment, at least for those people who agree to drive themselves into even more debt. Apparently, regulatory arbitrage is still part of the Citibank playbook.

The no-late-fee service is no doubt a boon to the well-off and forgetful, as it is portrayed in the marketing materials. But as is usually the case when discussing credit cards, it will work best for those who pay their bills in full each month. At the other end of the income scale, "Simplicity" is simply financial poison.

To illustrate the danger, suppose a customer makes a $10,000 balance transfer onto the Simplicity card. Sure, a $10 purchase that month would eliminate the late fee. And yes, it's easier to make a purchase (and get something you want) than to scrounge up a $400 minimum payment.

However, that $10 purchase could end up costing a lot more than what a bunch of pop songs are worth. As is typically the case, the bank applies payments to low APR balances before higher APR balances. So you'd have to pay off that entire $10,000 -- which for many people, is a time best measured in years, not months -- before knocking out that higher-rate charge for the $10. The bank will make up in interest charges what it loses in late fees.

With a big-budget, multimedia ad campaign supported by low-rate balance transfer offers, I'm sure the card will find its way into the hands of all manner of desperate families who cannot afford their minimum payments due to illness, job loss or Mother Nature. Sadly, they won't be able to afford this false lifeline either.

The "Simplicity" card. Brought to you by Citibank, the inventors of the "Dr. Evil" trading strategy.