The Consumer Financial Protection Bureau (CFPB) issued a bulletin1 on September 3, 2014 warning credit card companies that marketing materials for promotional annual percentage rate (APR) offers may be in violation of the unfair, deceptive, or abusive acts or practices (UDAAP) provisions of the Dodd-Frank Act.2 In the bulletin, the CFPB admonishes credit card issuers for not clearly, prominently and accurately disclosing in marketing materials and solicitations all of the material costs, conditions and limitations associated with promotional APR offers.
Credit card issuers frequently offer consumers low rate or zero interest APRs that apply to certain types of transactions, such as balance transfers from other cards or purchases made during a limited period. These offers may be marketed to consumers as a way to save money by financing a large purchase at the low promotional rate or by paying off a higher-APR card balance by transferring the balance to the new card with the lower promotional APR. The card issuer typically charges a transaction fee to the consumer for these offers, and the transaction fees are disclosed to consumers. Generally, if the cardholder pays off the entire statement balance on his or her credit card by the payment due date, the cardholder does not incur interest charges on the balance. This is often referred to as the “grace period.” With promotional APR offers, however, the cardholder is typically required to pay off the entire balance under the card, including the portion of the balance subject to the promotional rate, to take advantage of the grace period and avoid incurring interest on subsequent purchases made with the card.
For example, a consumer may open a credit card account with a promotional APR that applies to balance transfers to help the consumer pay off a large credit card balance on a higher-APR credit card by transferring the balance to the new card at the lower promotional APR. The consumer may then want to use the new credit card for other purchases and may plan to pay the credit card balances for subsequent purchases in their entirety on or before the applicable payment due dates. Under this scenario, the consumer may expect that the subsequent purchases will not incur interest charges because he or she is paying those off prior to the applicable payment due dates. The subsequent purchases, however, would in fact be subject to interest charges unless the consumer also pays off the full amount of the balance transfer that is subject to the promotional APR. In other words, if the consumer wants to maintain the balance under the card that is subject to the lower promotional APR (which may be what initially enticed the consumer to apply for the credit card offer), he or she must pay additional interest on subsequent purchases due to the loss of the grace period for such purchases.
The CFPB views these additional interest charges to consumers on subsequent purchases as an additional cost to the consumer for accepting and taking advantage of the promotional APR offer. The CFPB is concerned that consumers may not realize that the balance subject to the promotional rate must be paid off in addition to the balance for subsequent purchases to take advantage of the grace period and avoid incurring interest.
While credit card companies generally disclose transaction fees charged in connection with accepting promotional APR offers, the CFPB has found that many credit card companies either (i) do not disclose that purchase transactions made with the card will incur interest charges right away, unless the full balance on the credit card including the portion subject to the promotional APR is paid in full, or (ii) disclose this information, but the disclosure is not prominently located in the marketing materials or uses technical language so that it does not clearly explain the risks and potential costs of the offer.
The CFPB concludes the bulletin by alerting credit card companies to its expectation that they “implement internal controls sufficient to ensure that they market promotional APR offers in a manner that limits the risk of statutory or regulatory violations and related consumer harm” and ensure that marketing materials “clearly, prominently, and accurately describe the material costs, conditions, and limitations associated with the offers” and “describe the effect of promotional APR offers on the grace period for new purchases.”