If you've ever been shopping at a major retailer--particularly one that sells high cost items like furniture or appliances or even medical and dental services--you've likely been asked whether or not you want to open up a store credit card so that you can take advantage of a limited time low- or zero-percent interest rate.
These offers are great in theory because they provide an easy financing option for making big purchases, and if there's no interest, you can save big on finance charges compared to other credit card rates and personal loan options.
However, with these offers, you really need to read the fine print. In order to actually get the full benefit of the special interest offer, most card issuers require on-time payments and paying off the balance within the promotional period, which can be from six months to a year. Failing to follow either one of these requirements may cause the card issuer to levy interest charges that go back all the way to the purchase date. This effectively wipes out the special deal, and cardholders may discover that they actually end up paying more than the original balance.
The Consumer Finance Protection Bureau (CFPB) contests that lack of transparency about what the special rate offer entails and how what it calls "back-end pricing" doesn't explain well enough how much the special rate offer will actually cost the consumer. Furthermore, it may mean that card issuers promote these offers in questionable or illegal ways.
With this in mind, the CPFB is asking card companies to be more transparent in their zero-percent-interest promotions so that consumers are exposed to less risk.
"With its back-end pricing, deferred interest can make the potential costs to consumers more confusing and less transparent," said CFPB Director Richard Cordray in a statement. "We encourage companies to consider more straightforward credit promotions that are less risky for consumers."
This action stems from research the agency did in 2015, when it published a report examining deferred-interest promotions and their rise in popularity between 2010 and 2013, when participation grew by 21 percent.
While these offers can help people decide to pull the trigger to make that big purchase, the CFPB found that when consumers don't pay the promotional balance off in full, the card company assess them the accrued interest charges from the time they made the purchase. With interest rates on store cards averaging on the high side around 25 percent, this can be a lot of money.
The report found that over half the people who accrue deferred interest from that initial purchase also made subsequent purchases on the card and couldn't pay it all off by the end of the promotion, so they ended up paying more than what they should have saved. In fact, over one-third of these ended up paying over 150 percent more.
However, the CFPB also found that after the promotional period ended and deferred interest charges were assessed, people generally paid off their balances pretty quickly. The CFPB theorizes that the extra charges surprised people who may not have realized they'd be paying the full interest charges if they didn't complete the payments by the end of the promotional period.
The CFPB has sent letters to retail credit card issuers to encourage them to add more transparency to their special offers so consumers fully understand what they're getting into when they accept these offers.
The agency also encourages consumers to be vigilant about carefully reading the terms of zero-percent-interest and deferred-interest promotions so they can best understand whether or not accepting the offer will save them money in the long run. The agency recommends looking at the length of the promotional period, the post-promotion interest rate and how much one needs to pay in order to pay off the purchase by the end of the promotional period.
