Nearly seven years after a landmark overhaul of the credit card industry, regulators are renewing their scrutiny of a popular type of loan that can pack a big punch for consumers who don’t use it as intended.
Deferred-interest promotions, commonly offered on store-brand credit cards, give consumers a chance to buy big-ticket items like appliances, furniture or even medical procedures and put off paying any interest charges often for the first six to 12 months. Critics warn that the deals can be misleading and costly, because shoppers do not always realize they will be hit with interest charges for the entire period if they fail to pay off their balances by the end of the promotion.
In March, Richard Cordray, the head of the Consumer Financial Protection Bureau, told Congress that regulators had “significant concerns” about deferred-interest promotions, repeating a warning he has made for several months. In December, the agency issued a report that said the number of purchases using deferred-payment promotions had risen 21 percent between 2010 and 2013.
The report singled out such promotions as “the most glaring exception” to the trend toward “upfront” pricing after the passage of the 2009 Credit Card Accountability Responsibility and Disclosure Act. That act was a sweeping reform of card industry practices that aimed to eliminate hidden fees and curb abusive policies, particularly those affecting borrowers with poor credit.
Consumer advocates say stamping out potentially deceptive behavior is a constant challenge. As certain avenues for profit are cut off, the credit card industry moves to other permitted products.
“We think deferred-interest credit cards are probably one of the worst abuses, if not the worst abuse, that remains after the Credit CARD Act,” said Chi Chi Wu, a lawyer at the National Consumer Law Center.
Though the bureau won’t say whether it is pursuing specific cases, David Mayorga, a spokesman, says its analysis of the products is continuing.
“While deferred-interest products can offer benefits to consumers, they can also impose significant costs,” he said.
Retailers such as Best Buy, Home Depot and Walmart often use deferred-interest promotions. A December study of 49 major retailers by the credit card marketplace CardHub found that almost three-quarters offered financing, and nearly half of those included a deferred-interest plan. A majority of the cards with deferred-interest promotions are issued by the biggest providers of store-brand cards.
Citibank represented 35 percent of the offers and Synchrony Financial 29 percent, while Comenity Bank, a subsidiary of Alliance Data Systems, backed 12 percent of the promotions examined.
At Synchrony, which is a former unit of GE Capital, deferred-interest promotions made up 17.1 percent of its $65.7 billion in outstanding credit card loans as of Dec. 31, 2015. Some 80 percent of transactions are paid off before the promotions end, the company says.
Citi and Comenity do not break out financial data for deferred-interest promotions.
The promotions help sway consumer behavior. Synchrony explained in a March 2014 corporate filing that “the availability of promotional financing is important to the consumer’s decision to make purchases of ‘big-ticket’ items and a driver of retailer selection.” Of the small and medium-size businesses that offer its store-brand cards, 88 percent use deferred-interest promotions.
“We are committed to ensuring consumers understand that deferred interest is a fair, transparent and easily understood product, and that they understand how to avoid paying interest,” Samuel Wang, a spokesman for Synchrony Financial, said. “We have taken a number of steps to improve and enhance our disclosures and consumer education well beyond what the C.F.P.B. and the law require.”
Comenity declined to comment. Janis Tarter, a spokeswoman for Citi, said a majority of its borrowers pay off the balance before the promotional period ends.
“We communicate clearly and frequently to customers throughout the life cycle of the product to help customers avoid paying interest,” Ms. Tarter said.
The offers can trip up consumers who don’t do their homework, however. Sara O’Hara, 26, and her husband, Brandon O’Hara, 24, accepted a 12-month deferred-interest mail solicitation from Discover in 2013, as they were planning their wedding.
The couple, who are from Bozeman, Mont., paid the minimum on their card every month for 12 months but got a big surprise when they returned from their honeymoon during the 13th month: an extra $800 tacked on to their outstanding balance. It was the interest backdated to the month they opened the account.
“I’m sure there was very fine print that explained everything, but it was our very first credit card and we didn’t really know how it all worked,” Ms. O’Hara said.
“It was this moment of panic,” she said. “It was really shocking for us.”
Derek Cuculich, a spokesman for Discover, said the company wouldn’t comment on specific accounts, citing customer privacy.
Card industry officials defend the promotions as cost-effective. The Consumer Financial Protection Bureau’s December report revealed that a majority of those who take advantage of these deals have prime or superprime credit scores and pay off their card balances before being assessed interest payments roughly three-quarters of the time.
“It’s a very popular program, and overwhelmingly consumers benefit from it,” said Mallory Duncan, general counsel at the National Retail Federation. He said the programs should be structured “in a way that’s transparent, competitive, and so that customers use them in the way they’re intended.”
But for consumer advocates, longstanding problems with the promotions remain.
The bureau found that consumers with very low credit scores avoid interest charges only about half the time. Retailer cards, including those with deferred-interest promotions, also tend to carry substantially higher interest rates than so-called general-purpose cards.
In January 2009, several financial agencies, including the Federal Reserve, completed a joint rule banning the product.
The agencies quickly pulled back, clarifying their position in May that year to allow the promotions in certain cases. The CARD Act, signed into law a few weeks later, also permitted them. Consumer advocates note that the reversal came after several months of lobbying by retailers and banks. But the timing of the push may have also been a factor, coming after the banking crisis in 2008.
“There was a lot of conversation about how deferred-interest promotion programs help customers purchase needed items when credit is tight – and at the time, credit was tight for everybody,” said Mercedes Tunstall, a partner at the law firm Pillsbury.
Lately, there has been a crackdown. In December 2013, regulators ordered Synchrony – then GE Capital – to pay back more than $34 million to consumers enrolled in its medical credit card program for lack of clear disclosures. Last August, Springstone Financial refunded $700,000 to consumers who had signed up for its deferred-interest dental card without being given proper instructions.
And last May, the online payments giant PayPal was fined $10 million over its “Bill Me Later” service, in part for unfairly charging some customers deferred-interest fees. The company was also required to return $15 million to consumers who used the service, which is now called PayPal Credit.
The consumer bureau’s approach could mirror actions against credit card “add-ons,” such as payment protection and identity monitoring. The agency filed a series of enforcement actions against the card issuers starting in 2012, citing deceptive practices, and managed to transform the way those add-ons are marketed and sold without writing a formal regulation.
Alan Kaplinsky, a partner at the law firm Ballard Spahr, said he thought many bank issuers had already brought their disclosures around deferred interest into compliance, though it hasn’t always been easy without a formal rule in place.
“It’s taken a while for the industry to figure out what the C.F.P.B.’s expectations were,” said Mr. Kaplinsky.
“If they find an issuer they think is hiding the ball about how these promotional offers work, there’s no question in my mind they’ll certainly go after that credit card issuer,” he added.
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