The Consumer Financial Protection Bureau (CFPB) announced in a press release that it sent letters to top retail credit card companies encouraging them to use more transparent promotions for the sake of consumer protection.
With many retailers using credit cards with deferred-interest promotions, the CFPB expressed concerns that they may surprise consumers with high, retroactive interest charges after the promotional period ends. In order to avoid this, the CFPB suggests that retail companies consider using a 0 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.”
A 2015 CFPB report found that the number of purchases using deferred-interest promotions rose 21 percent between 2010 and 2013. This type of promotion is typically offered on retail credit cards and give consumers a way to buy items such as appliances and furniture or even medical or dental services and pay the cost over time. 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.
But if any balance remains when the promotional period ends, consumers are charged accrued interest on the promotional balance from the time of purchase. Since the interest rate on these cards is generally about 25 percent, 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.
Some consumer protection issues that have caused the CFPB concern include the fact that 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. In fact, more than one-third pay more than 150 percent of the full amount of their promotional balance during the promotional period.
In addition, a 2015 CFPB study found that many consumers who do not repay the promotional balance within the promotional period do pay off the remaining amount and the deferred-interest charges shortly thereafter. This suggests that the interest charges may have caught consumers by surprise.
A 0 percent interest promotion would charge consumers interest only on the balance that remains, which has more transparent costs for consumers.
Last month, Walmart announced it will no longer offer deferred-interest promotions on its store credit card. It is now offering customers 0 percent interest promotions on eligible retail purchases made on that card.