How To Wreck Your Finances By Buying a PlayStation 3
I usually like Robert Scoble, but this post has some of the worst advice I’ve ever seen.
The background: Sony’s new PlayStation 3 game console is coming out next month. By all accounts it is a very powerful system. Also by all accounts, it will cost more than any other game console to date — $600 for the base unit, and you’ll need an HDTV to get the most out of it.
Many people have said that those prices put the system out of reach for most normal people. Scoble disagrees:
There’s a meme out there that only rich people will be able to afford Playstation 3’s. That’s bulls**t.
Let me tell you how it works in the US of A. You walk into Best Buy. Ask for a credit application. Fill it out. They approve you for $10,000 on the spot (as long as you’ve paid all your credit card bills on time). You head over to the big screen department, pick out your $4,000 big screen and your $600 Playstation 3, and a $500 HD-DVD drive. Then you pay something like $140 per month in payments.
Can’t afford that much? Then get a screen that costs about $1,500 instead.
Yeesh! Yes, everyone should definitely take out $10,000 in high-interest consumer debt just so they can afford a new PlayStation. That shit makes a lot of sense. Especially when the average American already carries $8,500 in debt on their credit cards alone. Jeez Louise.
Let’s take a look at this magic credit you can pick up from Best Buy. The standard Best Buy credit card is advertised as having “no interest for 90 days on all purchases”. Woo hoo! No interest!
But what happens when those 90 days are up? Read the fine print:
Interest will be charged to your account from the purchase date if plan balance is not paid in full within 90 days or if minimum monthly payments are not made.
That means that if you haven’t paid off your purchase in full by the time the 90 days are up, you’re gonna get charged interest retroactively. In other words, on day 91, you get charged interest for days 0-90. So “no interest for 90 days” is more like “no interest for 90 days, if you can pay the total amount by then.”
And how much is that interest rate?
Program A: Variable Standard APR: 22.65% as of 10/1/06. Variable Default APR: 26.65% as of 10/1/06. Plan B: Variable Standard APR: 25.65% as of 10/1/06. Variable Default APR: 29.65% as of 10/1/06.
Let’s parse this out. This language lists two programs, “A” and “B” (probably one for people with good credit, and the other for the rest), each of which has two interest rates: a “Variable Standard” rate and a “Variable Default” rate. But what does that mean?
What it means is that, in the best case, any balance you carry after 90 days is gonna be charged 22.65% interest (the “standard” rate). And if you’re late on your payments twice, it shoots up to nearly 27% — or, if you’re already credit-challenged, a nosebleed-inducing 30% (the “default” rate).
30% interest, people. Let that roll around in your head for a minute.
Amazingly, though, the Best Buy offer isn’t the worst available. That honor would go to cards that include “universal default” clauses in their cardmember agreement. “Universal default” is a relatively new practice where the company that issued your card watches your credit statements, and if you’re late on a payment to anybody — or even if you pay all your bills on time but do something that indicates that their “risk” in extending you credit might have gone up, like simply carrying a lot of debt on other cards — they can declare you in default and jack up your interest rates. Even if you’ve never been late on a payment to them.
(Based on my reading of the fine print on the Best Buy card, it does not appear that it carries a Universal Default clause, which is probably the nicest thing I could say about it. I am not a lawyer, this is not legal advice, your mileage may vary, blah blah blah.)
All of which leaves me a little gob-smacked at Scoble’s suggestion. (In the comments, after defending his post for a day, he seems to agree, caling it “stupid”.) Taking out $10,000 credit at 23%-30% interest would be bad enough if it was for something you really needed.
How badly do you need a PlayStation 3? Bad enough to dig yourself into a hole for five years or more to get it?