Do you have a card with deferred interest? This type of card generally charges a much higher interest rate than standard cards, and sometimes the rates are not disclosed clearly. A deferred interest card is a card that lets you pay off a purchase over a certain period of time without having to pay interest on it. The problem is that if you don't pay it off in full before that period ends, you will have to pay interest - and the rates are usually very high! The CFPB released a report in December that found the number of purchases made with deferred interest cards increased 21% from 2010 to 2013. Deferred interest promotions are commonly used by retailers during the holiday season to encourage shoppers to make large purchases that they can pay off over a period of 6 to 18 months without worrying about accruing interest.
The Card Accountability Responsibility and Disclosure Act of 2009 requires card issuers to obey strict upfront pricing rules, detailing exactly how much cardholders will pay for credit. The CARD Act was intended to stamp out the hidden fees and other deceptive practices that card issuers used to bilk unwary consumers.
The CFPB report highlighted deferred interest credit cards as one of the worst remaining abuses not eliminated by the CARD Act.
According to Synchrony, a former division of GE Capital, deferred interest loans make up 17.1% of its portfolio of $65 billion of unpaid credit card balances. The company told the New York Times that about 80% of deferred interest loans are paid off before the promotion period ends, so most cardholders end up paying no interest.
Citibank and Comenity, which also issue many deferred interest cards for retailers, did not disclose exactly how many borrowers end up paying deferred interest. A Citibank spokesperson told the New York Times that more than 50% of its borrowers pay off the principal before the deferred interest promotion ends. The most important thing to keep in mind when using a credit card (whether it has a deferred interest promotion or not), is to pay of your balance in full by the due date. If you use your credit card wisely, you won't have to pay any interest at all.
According to the CFPB's December report, most borrowers who sign up for deferred interest promotions have prime or superprime credit scores and pay off the loans before the getting hit by amassed interest about 75% of the time. The other 25% of the time, borrowers can sometime end up paying more than the value of the loan in backdated interest.
Less savvy borrowers with subprime credit scores end up paying the deferred interest about 50% of the time, according to the CFPB.
Retailers' cards often charge higher rates of interest than standard cards, often about 20% to 30% according to the Consumerist, which makes deferred interest particularly hard on borrowers' wallets.
In January 2009, the Federal Reserve and other financial agencies drafted a rule to ban deferred interest promotions entirely. After fierce lobbying by banks and retailers, the Fed pulled back and the provision banning deferred interest promotions was removed from the CARD Act.
Now regulators are taking a second look at the controversial practice. Banks and retailers can still charge deferred interest, for now, but the CFPB and other regulatory agencies are going after outfits that don't properly inform customers about the risks.
In late 2013, regulators ordered Synchrony to pay cardholders more than $34 million because it did not clearly disclose the financial risks associated with its medical credit card. In May, PayPal was fined $10 million for unfairly charging deferred interest fees to some customers who used its Bill Me Later feature, and had to reimburse customers $15 million.