Deferred interest credit card promotions, which promise zero interest if you pay off the purchase within the promotional period, are getting costlier for consumers, according to a federal report on the credit card market released Wednesday.
Rather than avoiding interest, people signing up for the deals wound up paying slightly more than $2 billion in 2016, according to the report issued by the U.S. Consumer Financial Protection Bureau.
“The aggregate amount of deferred interest assessed to consumers increased by 10 percent from 2015 to 2016,” the report said.
The programs are costly for users who fail to pay off the promotional balance by the deadline, triggering months of interest charges that had been deferred during the promotion.
People with deep subprime credit scores only managed to pay off the balance 46 percent of the time, the report said. Those with super-prime scores met the deadline 86 percent of the time.
The data could not tell if the increased interest cost was due to higher volume or more people missing the promotional deadline. However, it did note that payoff rates declined. The payoff rate in 2016 for six- to 17-month promotions was 72 percent, down from the overall 76 percent to 82 percent payoff rate seen between 2009 and 2013.
Report mandated by 2009 CARD Act
The 2009 Credit Card Accountability, Responsibility and Disclosure Act requires the government to report on the consumer credit card market every two years. Responsibility for producing the report was given to the CFPB after the agency opened in 2011.
The law, signed in May, 2009, provides protections from surprise fees and retroactive rate increases, among other costly traps. In its previous report in 2015, the CFPB said the law had saved consumers $16 billion, nearly eliminated over-limit fees and cut interest rate fees 20 percent.
The 2017 report, issued a month after President Donald Trump appointee John M. “Mick” Mulvany took charge of the CFPB, displays a tone change from previous years’ reports. Where the 2015 report highlighted three concerns for consumers in its executive summary – deferred interest costs, subprime specialist card fees and rising variable rates — the 2017 report drops the “areas of concern” section from the executive summary. It leaves discussion of deferred interest costs to the body of the 352-page report. Rewards are cited as one source of “significant innovation” in the summary, without mention of the perils outlined in the 2015 report.
Mulvany, the deregulation-minded head of the White House Office of Management and Budget, has signaled that the consumer bureau will be a “dramatically different” agency under his leadership. Mulvaney’s status as acting director is being challenged in court by CFPB Deputy Director Leandra English.
The report can be an indication of the CFPB’s regulatory and enforcement stance. After criticizing deferred interest card deals in its 2015 report, the agency launched an investigation of Synchrony Financial, a top issuer of store cards, focused on its marketing and servicing of deferred interest cards.
Rewards come in for praise
Credit card rewards, an area of concern in the 2015 report because of complicated rules that could be “glossed over by marketing materials,” were praised in the 2017 edition. Citing comments from a bank industry consulting group and a letter from the American Bankers Association, the report said, “The bureau is encouraged by efforts to improve the clarity and user-friendliness of rewards card products and disclosures,” while it continues to monitor programs “for opportunities to improve consumer experiences and outcomes.”
However, consumer complaints about credit card rewards jumped significantly in 2016, the CFPB’s complaint database shows.
Consumer advocates take different tone
Comments submitted to the bureau from consumer advocacy groups have a markedly different emphasis on what they see in the credit card market.
“The CARD Act continues to keep credit card issuers in check – for the most part – however there are some practices that Consumer Action has observed that have worsened over time,” says a June 8, 2017, comment letter submitted by Consumer Action. It points a finger at credit cards’ high interest rates, deferred interest problems, incomplete disclosures of terms and other consumer perils.
Card market factoids
The consumer protection bureau’s report also weighed in on these aspects of the consumer card market:
- Credit availability remains stable overall and across different credit score groups. General purpose cards saw approval rates of 44 percent in 2016, while store cards approved 51 percent of applicants. By credit score group, approval rates for mass market cards ranged from below 10 percent for deep subprime customers to over 80 percent for super-prime applicants.
- Secured cards are gaining in popularity, as more consumers sign up for cards that require a cash deposit. The number of new mass market secured cards was 7 percent higher in 2016 than 2015, spurred by deep subprime consumers or those with no credit score. For consumers 21 to 34 years old, about 7 percent of cards issued were secured cards.
- Card comparison websites are an increasingly popular way for consumers to find new cards, while direct mail solicitations are flat. In 2016, comparison sites (which include CreditCards.com) accounted for nearly 20 percent of new general-purpose card originations, or more than 5 million new cards.
- Total cost of credit was 14 percent of balances annualized in 2016 for general purpose cards, with 18 percent coming from fees and 82 percent made up of interest. Store or “private label” cards had a total cost of credit of 21 percent annualized.
Since 2010, new credit card account openings have grown about 50 percent, the report said, having increased steadily as the financial crisis receded. In 2016 consumers opened 110 million new accounts, the most since 2007. However, new accounts remain below their pre-recession peak levels. Available credit on cards reached $.4 trillion, compared to the mid-2008 peak of $4.4 trillion. Average card debt is up 9 percent over the past two years overall, with deep-subprime cardholders seeing their card debt load increase 26 percent.