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Consumer Financial Protection Bureau warning on credit card promotional offers
The Consumer Financial Protection Bureau has issued a bulletin warning of deceptive and/or abusive acts and practices in connection with solicitations that offer a promotional annual percentage rate (APR) on a particular transaction over a defined period of time. These transactions include, but are not limited to, convenience checks, deferred interest/promotional interest rate purchases, and balance transfers. The Bureau has observed that certain solicitations for these types of offers risk being deceptive if the marketing materials do not clearly and prominently convey that a consumer who accepts such an offer and continues to use the credit card to make purchases will lose the grace period on the new purchases if the consumer does not pay the entire statement balance, including the amount subject to the promotional APR, by the payment due date. In addition, depending on all of the facts and circumstances, a credit card issuer may risk engaging in abusive conduct if it fails to adequately alert consumers to this relationship.
Many credit card issuers offer consumers a grace period on new purchases. This means that a consumer who has paid his previous balance in full typically has a period of time after the close of each billing cycle to pay his full balance without incurring interest on the purchases made during the billing cycle. If the consumer fails to pay the entire balance for the billing cycle by the payment due date, the purchase amount that is not paid is subject to interest calculated from the date of purchase (or the first day of the current billing cycle, whichever is later), and the consumer will lose the grace period in the current and future billing cycles for all new purchases until the entire balance is paid in full.
Credit card issuers may periodically offer consumers the opportunity to transfer a credit card balance or make a purchase that will be subject to a low or zero percent APR for a stated period of time. (e.g., one year) These offers are often marketed as a way to save money by paying off higher-APR cards or to finance a large purchase over a period of time without incurring substantial interest charges. Issuers typically charge a transaction fee for accepting these offers; generally either a percentage of the transaction or a fixed dollar amount, whichever is higher.
CFPB supervisory experience has observed that some card issuers do not adequately convey in their marketing materials that a consumer who accepts such a promotional offer will lose his grace period on new purchases if he does not pay the entire statement balance, including the total amount subject to the promotional APR, by the payment due date. Affected consumers would be those who maintain a grace period on purchases by paying their full statement balance by the payment due date each month, accept the promotional offer, and then continue to make purchases using the credit card. Consumers may incur charges that they do not anticipate – and fail to save the money that they expect – if issuers fail to convey the effect of accepting the offer on the grace period.
Card issuers often market these promotional offers as a chance for the consumer to save money. Many solicitations emphasize the promotional rate associated with the offer, and that the promotional rate will last for a certain period of time – in some cases, well over a year. Depending on the facts and circumstances, the impression conveyed by these materials may be that the only cost of obtaining the promotional interest rate is the transaction fee set forth in the tabular disclosure required by Regulation Z, or that the promotional rate is the only rate at which the consumer will incur interest charges.
The Bureau has found that one or more card issuers created and failed to cure such false impressions. The card issuer or issuers did not adequately convey that the promotional rate offers come with an additional contingent cost that would be important to consumers who maintain a grace period on purchases. Specifically, a consumer who accepts the offer and continues to use the credit card to make new purchases in subsequent billing cycles will not be able to avoid paying interest charges on those new purchases unless he repays the entire balance (both the promotional balance and any new purchase balance) by the statement due date. As a result, the consumer will incur additional interest costs on later purchases until the grace period is restored after full payment. For such a consumer, those interest costs may represent a significant share of the total costs of accepting the offer.
The Bureau has observed that some issuers do not include any information about the loss of the grace period for affected consumers in promotional rate marketing materials. Other issuers may include information regarding the loss of the grace period, but the information is not prominently located in the marketing materials, or uses technical language that fails to clearly explain the full terms, risks, and potential costs of the offer. In the absence of clear language placed in a prominent location, a reasonable consumer’s net impression of the solicitations could be that the only cost of obtaining the promotional APR is the disclosed transaction fee, and that the consumer would only incur interest charges at the promotional rate because the only unpaid balance on his credit card would be subject to the promotional APR. This misleading net impression would be presumptively material because it pertains to a central characteristic of the product – its cost.
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