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. (
), JPMorgan Chase & Co. (
), Citigroup Inc. (
) and American Express Co. (
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
- 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
- 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
- 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.
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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