[jugad]

Brief version: Its sounds like the benefits of "simple interest" are being inflated and being used as a marketing tool. The monetary difference between simple and compound interest are minuscule if the interest is paid off every month - which this service insists on. If you pay off 100% of your compound interest every month, you can only save a few cents per month by signing up with this simple interest. If you can't pay off 100% of your interest every month (the only scenario where simple is substantially better than compound), this service is not available to you.

This looks like marketing a very marginally better product (if at all), with excessive pomp. This is no revolution... its much more like well disguised misleading stuff from financial institutions that we are so much used to.

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[ edited to clarify some points ]

Karthik,

Since you insist on the complete interest being paid at the end of each month, the grand idea of "simple interest" has very little meaning. Hear me out here...

The whole idea of compound interest is to charge interest on the unpaid interest. You are "solving" the compound interest problem by not compounding interest for a month and forcing people to not have unpaid interest at the end of the month. However, the benefits amount to very little. If people are capable of paying off their interest at the end of each month, there is little difference between simple and compound interest.

I find your explanation on simple interest (https://www.simplycreditinc.com/simpleinterest) a bit misleading and self serving.

The difference between simple and compound interest (as stated in your essay) arises only in the long run, and your service does not allow long runs of unpaid interest... which means there can only be very little difference. Its misleading to compare long runs (> 30 days) if you don't allow them. The large savings from simple interest only apply to people who cannot pay the interest for 4 years. But you will kick them out after 2 months of non-payment.

Also, if a person is capable of paying the interest every month, they don't gain anything by signing up with your service... maybe a few cents on 5000$ every month, but that's it. Nothing more.

The positives I really see...

  1. Convenience of not worrying about paying different credit cards.
  2. Possibly lower interest rate... but I have seen no solid numbers on that on the website.
  3. By forcing people to pay off the interest every month, you might make them more financially responsible.
  4. I would like to see banking evolve, and this might be a ray of some hope... but I need to see more.

Also, it will be useful to give us some ballpark figures on the APR... I would like to see a table of some figures before I take the pains of giving out further details.

[sksk]

[TL;DR] Simple Interest may looks like has a small delta but for a lender it adds up to some serious money. Also, $2 a month (compounded for a shorter period) adds to $24 / year. We are not about simple interest alone. The revolution (not our words) if any is really taking down the credit card companies without re-inventing a new credit card product.

Hi Jugad,

Thanks for the constructive comment. I want to first clarify one thing -- we are not 'claiming' we are revolutionizing the industry by switching to simple interest (it is a pretty big deal though for the industry as you will see in my comment below but that's not a claim we are making) . As you pointed out the biggest value prop of our service is convenience (you get to keep your credit cards -- no change in your day-to-day use) and lower rates (our rates will be 3% to 15% lower than credit card companies for comparable risk rating) and really diverting the revenue from the credit card companies so they will be forced to change their ways. I can write pages about all the ways a credit company screws a consumer but that will take us away from your very balanced comment.

All the current approaches rely on giving people cash in the form of personal loans supposedly to pay down credit card debt. I can tell you from working in this industry for so long that this does not really put a dent on the credit card companies. At least, for now those consumers eventually start using their cards again and get trapped in debt because the credit card companies don't want them to pay more than the minimum payment. This is what's unique about what we are doing:

Normal: Consumer Spends $1000 -> Pays less than full balance -> Incurs interest -> Bank gets paid handsomely

Ours: Consumers spends $1000 -> SimplyCredit Pays the bank $1000 -> Consumers incurs interest at a lower rate -> Bank gets nothing -> We get paid what we believe is a fair amount

The above picture eliminates the vital revenue source from the banks. Now why this is better for the consumer:

* We have no fees (no late fees, no penalties). The credit card terms are practically irrelevant.

* We don't re-price you upwards (credit card companies do this all the time and that's how they start low and increase your rates as you start building balances -- CARD only solves a portion of this problem)

* We really encourage people to pay much more tan the minimum payment. Banks fought so hard for minimum payment warning in CARD that it is only marginally useful now. We don't want to be like them and that's not our goal.

Back to your original point about simple interest:

* You are correct, we can probably do better in characterizing the benefit as no one is going to compounded their balances over 4-years without paying down principal. We will try to come up with additional examples -- we wanted to keep it simple to illustrate the issue of compounding but point taken.

* The benefit will be meaningful when it look at it over the life of the debt. People paying $2 extra per month means they pay $24 / mth. Over 5+ years period they have paid a good chunk in extra interest just because of compound interest.

* That said, do you disagree with our characterization that this is 'unfair' and 'complicated'? If you ever had to pay interest on your card, please take a look at that statement and see if you can figure out how interest was calculated. Don't just read about the average daily balance and daily rate statements, try to calculate it on a piece of paper.

* I also don't quite agree that this change is 'minuscule'. There are a few things to keep in mind:

* First, department store cards defer interest 6 to 12 months and it is getting compounded away for a really long time. They also charge 25-30% interest. You can repeat the math for that period and interest rate and you can tell me whether that difference is meaningful. You will most likely see a 10-20% difference between compound interest and simple interest. For most people here it $100 more is not a big deal may be but that could be one additional payment for someone else.

* Yes we are making people pay their interest each month but why should we compare against ourselves? Shouldn't be comparing it against what the industry does, which wants things compound away without your realizing it?

* If this is so trivial as you said, why isn't ANYONE doing this? Some people who claim 'simple interest' in their marketing but actually compound. They all do personal loans with EMI. Guess what the standard formula for EMI is a compound interest. Just because you get fixed monthly payments does not make it simple interest.

* To answer my own question above: the industry will not do simple interest any time soon and this is why: A typical bank's gross yield is about 11% and with simple interest they will drop down to roughly 10%. That's a 10% drop in revenue. BUT, their ROA is 3% so a 1% drop in revenue without reducing default rates (switching interest rates formulas will not help here) or opex, their profit drops by 33%. You think a bank will willing take 33% hit to their profit? To you it may sound minuscule but these dollars add to a huge amount. This is in turn used against the very same consumers in the form of heavy lobbying. Is this the world we want?

In summary, I appreciate your calling out on the simple interest page. We certainly not using it as a marketing tool as we are indeed trying to fix a system as I explained to you above -- we are giving up huge sources of revenue (fees and the compound interest delta). But this page is important and we will make it better -- we will try to come up with a typical credit card user payment behavior and show the difference.

I would urge you to look beyond the simple interest delta. To you it is not a big difference but to a lender it is and we are making the sacrifice to keep things simple for the consumer. We are eliminating a whole bunch of crap from the terms that trip up consumers along the way.

I wish we are ready to signup 1000s today but alas integration with banking system requires a measured roll out. We will release more and more information over time to show how this is really different for a consumer. If you have additional suggestions, please send it our way. you can guess my email easily.

Thanks for reading this far.

[jugad]

Thanks for the detailed reply. I look forward to your website updates and the future simplification of the credit industry.

I also find it a little surprising that the 30 day numbers are missing from your simple interest page... that's the single most important time frame, given that its common to everything that we are talking about.

I did some numbers on the 5k outstanding debt. After 30 days, simple and compound interest difference, on 5k debt looks like this...

  compound interest total : 5074.50
  simple interest total : 5073.97
  difference : 0.53

So, a regular joe would save 53 cents a month on debt of 5k, if they pay off more than the interest every month.

Also, you seem to be putting a lot of emphasis on the evils of minimum payment in your comments... and if the minimum payment is less than the monthly accrued interest, that is EVIL. I hate paying a single cent to the banks in interest, and have had enough money to pay all debts in full every month. So I never felt the need to study the minimum payment booby trap in detail. But if banks are doing that... I hope you succeed in derailing them.

Good luck convincing people to be financially responsible, while other banks are inviting them to be irresponsible.

I think building a story around "avoiding the minimum payment booby trap" might be useful... but its a complicated story to tell in a way that an average joe with a short attention span can understand.

[sksk]

One more thing. 30 days is not the right point as payments are usually due 28 days after the statement is issued and most people (people who carry a balance) pay closer to the end -- all this while things are getting compounded. So your 0.53/mth will be more like 0.9/mth in practice.

As you could this gets into a lot of nuances on how people use credit cards today. We attempted to keep things simple and it lead to a totally different issue, which you raised. We will try to revise it to make it more like a what a user will do over the life of their debt and compare. Again, financial delta for each user is not the issue but rather the 'fairness' of this whole thing -- how does compounding really benefit the consumer?

[sksk]

Yup, your example will amount to $.53 * 12 = ~$6 / year (assuming no deferral). Typically people end up staying in debt for a few years (4-6 years) because of the way the banks structure payments. So you may conclude, what the heck, $25 more over 4 years, why do I need to care? But you need to look at the system as a whole to address this problem. Finance is a very low return game (as % of assets) so people try to make $1-2 by charging this or that and in grand total adds up to billions. That's why nobody in the industry will switch to Simple Interest. I don't think our value prop is just saving $6/year (assuming interest rate is the same) -- it is really about doing the right thing for the consumer and keeping it simple.

Oh btw, I am comparing compound interest like how a normal person will calculate it. A credit card company does not do it this way. It is a mess and it not trivial to reproduce their calcs.

Regarding minimum payment: the evilness is not whether interest is being required at the end of the month or not (in non-deferred situations they are) but how artificially low they set minimum payments. For example, my Chase card is 1% of principal. ~40-50% of the people only pay minimum payment in the US and imagine paying at 1% principal, will take you 8-9 years to pay it off. If you change the payment just a little bit (even $50-100 / mth more) can dramatically lower your overall costs.. the credit card companies fought tooth and nail to not put 'minimum payment warning box' saying it is confusing (the idea behind the box was to tell the consumer how much the payment should be to pay it off in 3 years). Wouldn't you want as a consumer to know what's the right thing to do? We have treated credit card companies like doctors -- let them decide what's right for you. That's why we got into the financial crisis and we can do better.

We know consumers are not just going to give up on credit cards and that's why we built SimplyCredit to work on top of the existing system instead of trying to create a new one. They don't need to change anything but they now have a better financial product. Our customers not only like the convenience but also the fact they know exactly what they are getting into and there is a company that is not trick you into paying more.

Check the first link: https://www.google.com/search?q=Citigroup+to+Pay+%24770+Mill... Also check: http://blogs.wsj.com/moneybeat/2015/07/16/credit-card-fee-in...

I am glad you have not paid any interest to these credit card companies. Our hope is that we can make more and more people like you. They made ~$100+ billion in revenue just from interest charges and I think it is time to put an end to it.