WASHINGTON—The Consumer Financial Protection Bureau has sent letters to top retail credit card companies encouraging them to consider using more transparent promotions.
The letters outline Bureau concerns that these promotions may surprise consumers with high, retroactive interest charges after the promotional period ends. The CFPB suggested that companies consider using a zero-percent-interest promotion that is more transparent and carries less risk for consumers.
“With its back-end pricing, deferred interest can make the potential costs to consumers more confusing and less transparent,” said CFPB Director Richard Cordray. “We encourage companies to consider more straightforward credit promotions that are less risky for consumers.”
Deferred-interest promotions are typically offered on store credit cards. They give consumers a way to buy items such as appliances and furniture, or even medical or dental services, and pay the cost over time, the CFPB reminded.
“Under a deferred-interest plan, the consumer pays no interest if the purchase amount is paid off within a set period, typically six to 12 months. If any promotional balance remains when the promotional period ends, consumers are charged accrued interest on the promotional balance from the time of purchase. The interest rate on these cards is generally about 25%, so these deferred-interest charges can be substantial. A consumer carrying even a small balance past the promotion’s expiration date may owe much more in interest than the remaining purchase balance due,” the Bureau stated.
A 2015 CFPB report found that the number of purchases using deferred-interest promotions rose 21% between 2010 and 2013. The Bureau said it has warned about the consumer risks associated with deferred-interest promotions due to their back-end pricing and associated lack of transparency.
The CFPB report raised several issues with these promotions, including:
- Consumers paying more than the promotional balance: More than half of the people who incur deferred-interest charges and have other purchases on the account pay more than the full amount of their promotional balance during the promotional period. More than one-third pay more than 150% of the full amount of their promotional balance during the promotional period.
- Many consumers may be able to meet the terms of the promotion but fail to do so within the set time period: The 2015 CFPB study found that many consumers who do not repay the promotional balance within the promotional period do pay off the remaining amount of the balance and the deferred-interest charges shortly thereafter. This suggests that the interest charges may have caught consumers by surprise, the CFPB noted.
“Instead of deferred-interest promotions, retailers could use a more straightforward zero-percent-interest promotion. Here, interest is not charged retroactively if the balance is not paid off by the end of the promotional period. Instead, consumers are charged interest only on the balance that remains. This type of promotion has more transparent costs for consumers. Last month, one of the nation’s largest retailers announced it will no longer offer deferred-interest promotions on its store credit card. It is now offering customers zero-percent-interest promotions on eligible purchases made on that card,” the CFPB explained.
A sample CFPB letter is available at: http://www.consumerfinance.gov/documents/4824/Deferred_Interest__Letter.pdf