Credit card companies should be more “transparent” with consumers about promotional interest rates, the Consumer Financial Protection Bureau said. The CFPB sent letters to retail credit card companies encouraging them to consider using zero-interest-rate promotions rather than deferred-interest-rate promotions.
The letters outline bureau concerns that these promotions – typically offered by retailers for consumers to fund larger purchases – may catch some unwary consumers off-guard with high, retroactive interest charges once the promotional period ends.
The bureau suggested that companies consider using a zero-percent-interest promotion that is “more transparent and carries less risk for consumers.” In this scenario, consumers would be charged interest only on the remaining balance at the end of the promotional period, rather than retroactively on the entire amount for the entire period.
Nearly half of retail-branded credit cards carried an APR of at least 25 percent, according to a 2016 survey from CreditCards.com, compared to a national average rate of about 15 percent for all credit cards.
A 2015 CFPB report found that the number of purchases using deferred-interest promotions rose 21 percent between 2010 and 2013. The report raised several issues with these promotions, including consumers paying more than the promotional balance and those who repay balances, but not within the promotional period.
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 percent of the full amount of their promotional balance during the promotional period.
The 2015 CFPB study also found that many consumers who do not repay the promotional balance within the promotional period do pay off the balance and deferred-interest charges shortly thereafter. This suggests that the interest charges may have caught consumers by surprise, the bureau said.
“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.”