Bureau Notes that Deferred-Interest Promotions May Lack Transparency, Carry Risks to Consumers
WASHINGTON, D.C.– The Consumer Financial Protection Bureau (CFPB) today announced it has sent letters to top retail credit card companies encouraging them to consider using more transparent promotions. Many retailers use credit cards with deferred-interest promotions – offers of no interest for a set period if the promotional balance is paid in full by the end – to give consumers a financing option, often for larger purchases. The letters outline Bureau concerns that these promotions may surprise consumers with high, retroactive interest charges after the promotional period ends. The CFPB suggests 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. 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 percent, 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.
A 2015 CFPB report found that the number of purchases using deferred-interest promotions rose 21 percent between 2010 and 2013. The Bureau 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 percent 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.
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 has published consumer tips about credit card interest-rate promotions. Consumers should be aware of factors that determine the cost of borrowing, which include:
- Length of the promotional period: Consumers should understand how long the promotional or deferred-interest period lasts. Some credit card companies vary the length of the time period based on the amount of the purchase.
- Interest rate after the promotional period: Consumers should know what the interest rate will be after the promotional period ends. A promotional rate is usually lower than the usual rate on the card. Store credit cards normally carry a much higher rate than a typical bank card.
- Payment each month needed to pay off the purchase during the promotional period:Consumers using a deferred-interest card to avoid paying interest on a purchase should figure out how much they need to pay each month to pay off the promotional balance before the promotional period ends. The minimum payment due alone may not be enough to pay off the balance by the end of the period.
The CFPB accepts consumer complaints about credit cards. To submit a complaint, consumers can:
- Go online at consumerfinance.gov/complaint
- Call the toll-free phone number at 1-855-411-CFPB (2372) or TTY/TDD phone number at 1-855-729-CFPB (2372)
- Fax the CFPB at 1-855-237-2392
- Mail a letter to: Consumer Financial Protection Bureau, P.O. Box 4503, Iowa City, Iowa 52244
- Additionally, through Ask CFPB, consumers can get clear, unbiased answers to their questions about credit cards and other financial products and services at consumerfinance.gov/askcfpb or by calling 1-855-411-CFPB (2372).