The Consumer Finance Protection Bureau (CFPB) has released a blog post warning consumers about deceptive introductory APR offers. They also issued a bulletin to credit card issuers that they may be breaking the laws by using these deceptive practices.
When it comes to introductory APR offers, there are a few ways which credit card companies aren’t being entirely honest which they use to deceive consumers and generate revenue.
- Failure to pay within the grace period will result in having interest charges applied for the whole 0% introductory APR term. A grace period is the period of time between when a credit card statement closes and when it becomes due. Failure to pay the minimum payment within this grace period means that you may forfeit your introductory APR and have to pay interest on previous statements. For example, Cindy does a balance transfer of $1,000 and is required to make a minimum payment of $25 every month within 23 days of her credit card statement closes. She has an introductory APR of 0% for 16 months and then an APR of 20%. On her 11th month she makes a late payment, Cindy now has to pay the 20% interest rate for not only her 11th month, but also the previous 10th months, she also looses the introductory APR for the 7 remaining months.
- Failure to pay in full will make it harder to receive your grace period going forward. You can also forfeit your grace period when you don’t pay in full, meaning you’ll have to pay interest charges even if you pay in full in the future. As most consumers are not paying in full when they have an introductory APR of 0% this can make it difficult for them to avoid interest charges when the promotional rate disappears.
- When making payments, these go towards the zero percent interest balance rather than new balances causing consumers to unknowingly rack up large interest charges. For example, Bruce does a balance transfer of $1,000 from an existing card to a card which has a 0% balance transfer offer. He then does $500 in charges on his new credit card. Bruce then sends a payment of $500 to his credit card issuer thinking this will pay off the $500 in new charges he made, the payment is instead applied to the $1,000 that was transferred which has a 0% APR. Because of this Bruce is liable to pay interest on the $500 in new charges.
Our Verdict
It’s good to see the CFPB cracking down on these terrible practices. It’ll be interesting to see if any credit card issuers actually get prosecuted or if this warning is enough for them to clear up their acts. As always, I believe the best course of action is to pay your credit card balance in full every month to avoid any potential interest charges or fees.
