Credit companies aren’t clear about offers, making consumers pay more

Editor’s note: This is the last in a three-part series about things the Consumer Financial Protection Bureau is up to. See the first part here and the second part here.

If you sign up for a store credit card, chances are you’re signing up for deferred interest — which as we explained Monday can cost you a lot more than a zero-percent interest offer.

The Consumer Financial Protection Bureau is asking retail credit card companies to end deferred interest card offers since many consumers don’t actually know what that means.

Because deferred interest misleads consumers into thinking they start paying interest on the balance at the end of a promotional period, the CFPB suggests giving them that very option — which is zero-percent interest — since it’s more transparent.

“With its back-end pricing, deferred interest can make the potential costs to consumers more confusing and less transparent,” says CFPB Director Richard Cordray. “We encourage companies to consider more straightforward credit promotions that are less risky for consumers.”

While deferred interest promotions can come from any credit card issuer, they typically come from retailers who offer store credit cards to shoppers. The difference between this and zero-percent interest is deferred interest means that if there is any remaining balance on a card at the end of a promotional period, you will pay interest adding up from the original amount. This is no big deal if you pay off the balance before the promotional period is up, but it’s detrimental to your credit if you don’t.

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“The interest rate on these cards is generally about 25 percent, so these deferred-interest charges can be substantial,” the CFPB says. “A consumer carrying even a small balance past the promotion’s expiration date may owe much more in interest than the remaining purchase balance due.”

How to not get duped by deferred interest

The CFPB study says one-third of consumers end up paying more than 150 percent of the original full amount due to deferred interest charges. Avoid these types of cards if you can, but if you have one, be sure to pay the balance off in full before the promotional period ends. If you have one and the promotional period has already ended, pay this card down as soon as possible to stop those extra interest charges and make it a goal to pay it like any other card — in full, every month.

If you can’t get around holding a balance in the short term, look for zero-percent interest promotions. This means that when the original offer ends and you still have a balance, you start to pay interest on the remaining balance, not the original balance. Also be sure to find out what the interest rate will be after the promotion ends. This way you know what you’ll be paying on top of the remaining balance.

Don’t just pay the minimum balance! While credit cards let you take your time during repayment, you shouldn’t actually take your time. Pay off as much of your balance as possible every month to avoid paying anything extra when the offer ends. The minimum payment is just that: the least you can get away with. There is no maximum!

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Article last modified on September 13, 2017. Published by Debt.com, LLC . Mobile users may also access the AMP Version: CFPB Wants Credit Card Offers to be More Transparent - AMP.