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Store cards urged to reconsider 'deferred interest' credit card offers

CFPB recommends issuers shift to simpler, less risky '0-percent' promotions instead

By  |  Published: June 8, 2017

Fred O. Williams
Senior Reporter
Expert on consumer credit laws and regulations

Retail credit cards urged to reconsider 'deferred interest' offers

Store credit cards should reform their 0-percent "deferred interest" credit card promotions to make them less risky for consumers, the federal government's consumer financial watchdog announced Thursday.

The U.S. Consumer Financial Protection Bureau released a copy of a letter it sent to top retail card companies, urging them to reconsider their deferred interest promotions. These are offers of no interest for a set time, usually six or 12 months, during which interest builds up in the background. If the full balance isn't paid by the end of the period, the built-up interest becomes due all at once.

“With its back-end pricing, deferred interest can make the potential costs to consumers more confusing and less transparent,” CFPB Director Richard Cordray said in a news release.

Instead of such programs, the bureau urged card companies to institute simpler 0-percent offers that don't carry risks of a retroactive interest wallop at the end of the period.

Letter follows Walmart move
The agency's letter comes on the heels of a move by Walmart to drop deferred interest promotions linked to its store cards. The retail giant said in May that it was switching to true 0-percent periods, in which no interest builds up during the promotional period.

"The reality is most people’s lives are anything but predictable, and paying off a purchase within a set period of time doesn’t always happen as planned," Walmart said in its blog post announcing the move. 

The CFPB wouldn't say which retail card issuers received the letter. Synchrony Financial, formerly GE Capital, is the largest player in retail cards, while Citi, Capital One and Alliance Data Systems/Comenity Bank are also top issuers.

Asked to respond to the letter, Synchrony Financial said it was committed to making its deferred interest deals "fair, transparent and easily understood by consumers." No interest is assessed on 80 percent of deferred interest transactions, vice president of communications Carlos Campos said in a statement. He called the deals important for consumers to afford big-ticket items, and for retailers to help drive sales.

"With its back-end pricing, deferred interest can make the potential costs to consumers more confusing and less transparent."

Not-so-great deals
With their promises of no interest for an extended time, deferred interest deals can look like a great way to finance big-ticket purchases such as electronics, appliances, furniture – or even medical procedures not covered by insurance.

However, many people run afoul of the complex programs and wind up with surprise interest charges, sometimes in the hundreds of dollars. Roughly one out of five users miss the deadline and have to pay deferred interest. 

In a 2015 report on the card market, the CFPB found that many people use the retail card they are issued for the deferred interest promotion to make other purchases as well. As a result, more than a third of promotion users paid 50 percent more than their promotional balance.

Deferred interest hits subprime borrowers hardest
The CFPB also found that many people who failed to extinguish the balance by the deadline in the promotional period paid off the remaining balance plus the deferred interest shortly – indicating that they were taken by surprise by the end of the program.

"The bureau’s research has found that deferred-interest programs tend to have uneven effects for different categories of consumers," Cordray said in remarks to the bureau's Consumer Advisory Board, "predictably posing the greatest costs and risks for the most vulnerable." People with low credit scores only manage to avoid the deferred interest charges about half the time, he said, while better-off consumers rarely get hit with deferred interest.

Advice to consumers about deferred-interest promotions
The consumer bureau also published consumer tips on managing deferred interest promotions, and how to tell them from simpler 0-percent offers.

Among the things to be aware of:

  • Payments needed to extinguish the balance. The minimum payment alone probably won't pay off the big-ticket purchase in time to avoid retroactive interest charges. Calculate the payment necessary and make sure the balance is extinguished by the deadline.
  • Length of the promotional period. Some card issuers vary the promotional period based on the amount of the purchase. Make sure you know when the period ends.
  • Interest rate. Although you don't expect to pay interest in a 0-percent promotion, know the rate that will apply. Store cards often carry higher interest rates than general-purpose cards.

Potential for industry-wide change
The CFPB's letter does not amount to formal guidance by the regulator, which is published and distributed in official channels. So card issuers are free to ignore the advice without risking a crackdown on their conduct.

However, the CFPB has issued such unofficial letters to industry before, for example urging card issuers to provide free credit scores to cardholders in 2014. That practice, also supported by credit score giant FICO, has caught on widely among card issuers.

 See related: How to avoid big costs of deferred-interest financing dealsDon't confuse introductory rate, deferred-interest deals

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Updated: 08-19-2017

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