Last week we started looking at the Consumer Financial Protection Bureau's (CFPB) biennial report on consumer credit cards and the gains that consumers have made since the CARD Act was signed into law, including saving billions of dollars on over-limit and late fees.
This week we're going to take a look at a few of the card industry's practices that the CFPB says are still risky and can be a concern.
The first is deferred-interest promotions. Are you tempted to open a new credit card because it offers a zero percent interest rate for a limited time? Do you use checks that your credit card sends you, offering little to no interest to transfer your other outstanding credit card balances--for a short period of time?
The problem that the CFPB finds with these is that they aren't clear with what charges consumers could face if they don't pay off their balances by the time the zero percent offer period is over. The agency explains that even though you aren't being assessed a monthly charge for interest, it's still accruing in the background. That means if you don't pay off the balance in full by the time the promotional offer ends, you'll be charged all of that interest you accrued during that offer, which essentially means you didn't land a deal in the first place.
The CFPB contends that the CARD Act helped consumers better know what their credit card costs would be up front. These promotional offers go against that trend. Furthermore, consumers with lower credit scores pay a higher interest rate, which means these offers could really cost them if they have an APR of 25 percent.
The next issue the CFPB is looking at also targets consumers who have low credit scores, and that's subprime credit card companies. Consumers with not-so-great credit have a hard time getting credit cards, but there are card issuers that target these customers who have subprime credit scores. Of course, the card company sees this as a risk, as these are customers who may or may not repay their debts, and so they charge more money in fees in order to lower their risk.
Subprime cards ten to have higher origination and maintenance fees than regular credit cards, and the CFPB says that the monthly payments these cardholders make tend to go toward fees and interest charges and not toward paying off their outstanding balance, which can make it hard for subprime consumers to get out of debt.
The CFPB also says that card agreements on subprime cards are also longer and more difficult to understand, which basically goes against the part of the CARD Act that is supposed to make credit easier to understand. However, the CFPB also notes that subprime credit card companies aren't the only culprits in terms of publishing complicated card agreements. The agency says that the industry can still work toward shorter card agreements that are more transparent.
Card agreements aren't the only terms that can stand to be improved. The CFPB says that information about card rewards programs can also be more clear and complete. Rewards cards are extremely popular, and the CFPB says over half of all consumers say they choose their credit card based on its rewards. However, rewards programs and their terms aren't necessarily fully laid out to consumers before they sign up for the card and that program guidebooks may not even provide all of the details on program terms, including the fact that issuers often have the right to change the rewards program whenever they choose to. This may make a rewards program less valuable to a cardholder without them being able to clearly see that fact and decide whether or not they should carry a balance or even continue holding that card.
While the CFPB didn't specify whether it would take any action on these areas, it likely will continue monitoring these practices and see where it can recommend improvements.
