CFPB Warns Credit-Card Issuers on Risky Promotional Offers - Analyst Blog


Flooded with numerous credit-card offers, consumers are easily enticed by the firms that promise the best promotions. Although most deals seem lucrative, reality begs to differ. Many offers soon turn out to be nightmares for consumers, saddling them with exorbitant interest charges.

Concerned about this development, the Consumer Financial Protection Bureau (CFPB) has warned credit-card issuers against luring gullible consumers and hitting them with surprise charges.

The fact that many credit-card issuers are not disclosing the hidden risks associated with popular promotional offers, had left the federal regulator worried. Consequently, the CFPB issued a notice to the credit-card companies on deceptive marketing promotions such as zero interest balance transfers, deferred interest offers and convenience checks. The bureau has also warned the issuers of legal action in case of any dissimulation.

Though the bureau did not name any particular credit-card company, there are many such firms that offer balance transfers including Capital One Financial Corp. ( COF ), JPMorgan Chase & Co. ( JPM ), Citigroup Inc. ( C ) and American Express Co. ( AXP ).

Hidden Costs of Promotion

Recent rules have restricted the types of fees that banks and credit-card companies can charge from customers. So in order to boost revenues, banks have devised credit-card related promotional offers like balance transfer and others. These are aimed at increasing the number of credit-card customers.

Credit-card issuers offer a grace period to consumers on new purchases. If a consumer is unable to pay the entire balance by the due date, the company starts charging interest on the unpaid amount. Not only that, the consumer subsequently loses the facility of grace period for all new purchases.

According to the CFPB, the issuers often refrain from clearly stating the hidden risks associated with credit cards. Hence, lack of information about the products often deceive many consumers and compel them to pay higher interests.

CFPB - Ramping Up Scrutiny

The CFPB was created by the 2010 Dodd-Frank Wall Street reform law, in the aftermath of the financial crisis. Its goal is to shield consumers from abuses or deceptive practices pertaining to certain financial products like credit cards and payday loans.

The CFPB released a bulletin featuring certain tips for consumers to help them understand how grace periods work and how to evaluate credit-card promotional offers. Key takeaways from the bulletin are as follows:

  • Consumers can take advantage of zero-interest offers and avoid surprise interest hikes by paying off the initial promotional purchase before making new purchases on the card.
  • Consumers have to be careful about making a timely payment. In case there is a grace period, consumers have to ensure that they pay off the entire balance before the end of the grace period.
  • If a consumer is unable to pay off credit card balance in full every month, it is better to consider cash or using a different card for making new purchase.

Bottom Line

Given this promptness of the regulator, we believe that the card-issuers will be more restraint while making promotional offers with hidden risks. This may even lead to a fall in the credit-card related revenues of the issuers to some extent.

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ OMX Group, Inc.

This article appears in: Investing , Business , Stocks

Referenced Stocks: JPM , COF , AXP , C

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