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The CFPB has launched a review of the store-branded card deals that offer 0% interest during an introductory period, but then reset to a much higher rate if the balance is not paid in full by a specific date.
October 22
Citigroup (NYSE: C) and General Electric (GE) would likely be hurt most by a regulatory crackdown on deferred-interest credit cards, a new report suggests.
Deferred-interest cards allow customers to borrow interest free for a specified period of time, often six or 12 months. But the offers differ from 0% financing, because consumers who do not pay off the entire balance by the end of the deferred interest period owe interest retroactively on the entire original amount charged.
Deferred interest is a feature of numerous store-branded credit cards, including offerings from Apple, Walmart, Best Buy, and Home Depot.
In October, the Consumer Financial Protection Bureau raised questions about how well customers understand the terms of deferred-interest cards, saying that it intends to study whether regulatory action is appropriate.
Then on Thursday, CardHub.com released a report that examined the deferred-interest credit cards offered by 22 large retailers.
CardHub found that eight of the 22 retailers issue their cards through Citi and a subsidiary bank; that list includes cards from Home Depot, Best Buy, Sears, Staples, Office Depot, Macy's and RadioShack.
Another seven retailers issue their deferred-interest credit cards through GE Capital, including Walmart, Lowe's, Amazon.com, JCPenney and Toys "R" Us. (Over the next two years, GE is planning to spin off its store-branded credit card unit into a new company.)
Further down the list were Comenity Bank, which issues deferred-interest cards for True Value, Victoria's Secret and Pottery Barn, and Capital One Financial (COF), which issues the cards for Kohl's and Menards.
Barclays PLC and WebBank each issue a deferred-interest credit card for one retailer on CardHub's list of 22.
In defending the products against criticism from consumer advocates, card issuers note that a large majority of the customers pay never pay any interest on the loans.
That's consistent with the findings of the CFPB, which reported last month that only 12% of borrowers with super-prime credit scores fail to pay off their balances before the end of the deferred interest period. Results were worse, though, for borrowers who had lower credit scores.
About 30% of borrowers with subprime credit scores, and about 43% of borrowers with subprime scores, are ultimately charged retroactive interest, according to the CFPB.
Looking across the entire credit spectrum, 20% of borrowers fail to pay off their balances before the retroactive interest kicks in, the consumer bureau found.
The CardHub report was critical of retailers that did not disclose how the cards work in a clear manner. Pottery Barn, Lowe's and Amazon scored lowest in that regard.
"I think most people see the very large print 0% interest, or no payments for 12 months, and that's very enticing," says Sonia Garrison, research manager at Evolution Finance, which runs CardHub.com.
"Often the smaller print is where you'll find the information about the high interest rates being applied to the full balance."
