Three years ago, the Consumer Financial Protection Bureau warned consumers that some credit card companies weren’t clearly disclosing the risks of promotions, including deferred-interest offers that promise not to charge interest on purchases as long as the balance is paid off by a certain date. However, if that doesn’t happen customers can find their bill nearly doubled thanks to retroactive interest charges. Now the agency is setting its sights on retailers, urging them consider more transparent promotions for store-branded credit cards. 

The CFPB today sent letters [PDF] to several top retail credit card companies encouraging them to consider providing potential customers with clear information related to promotions and the consequences to taking part in these offers.

According to the Bureau, if terms of these offers are not clearly outlined, customers can be surprised when they are charged high, retroactive interest charges after a promotional period ends.

Many retailers provide financing options for customers making large purchases for things like appliances, which often include opening a line of credit with the store. In order to persuade customers to pursue this credit, some retailers will provide a deferred-interest offer in which purchases will be assessed 0% interest as long as the full balance is paid by certain date.

If the balance of a deferred-interest card is not paid in full by a given date, the accumulated interest is assessed retroactively. In many cases, the retroactive interest rate is around 25%, the CFPB states, but could be even higher.

The CFPB’s letters take issue with this system, noting that the promotions are confusing for consumers and could cause financial distress. The letters — which were sent to unspecified retailers — came two years after the CFPB issued a credit card market report [PDF] that studied deferred-interest products and found they offer substantial benefits to some consumers, but carry significant costs to others.

CFPB director Richard Cordray notes in the letter that a lack of transparency related to deferred-interest offers can harm consumers by impeding their ability to manage their finances successfully.

The CFPB report on deferred-interest financing found that a disproportionate number of people with lower credit scores are often affected by the retroactive interest charge.

“It is important that every consumer fully understands the terms and true costs of promotional financing and is able to confidently make the best choice for his or her unique financial situation,” Cordray wrote in the letters.

In that vein, the CFPB suggests that instead of deferred-interest promotions, retailers use a more straight forward zero-percent-interest promotion.

With this offer, interest is not charged retroactively if the balance is not paid off by the end of the promotional period. Instead, consumers are charged interest only on the balance that remains.

The CFPB notes that one major retailer recently switched its store credit card to the less risky promotion.

In addition to sending letters to retailers, the Bureau released a series of tips for borrowers who may be considering using a credit card deferred-interest rate promotion. These tips include:

• Understanding the promotional period: Customers should doubt check the length of time their deferred-interest promotion runs. The CFPB warns that some credit card companies vary the length of the time period based on the amount of the purchase.

• Find the interest rate: Borrowers should find out the interest rate they will be charged when the promotional timeframe ends.

• Calculate monthly payments: In order to ensure they aren’t affected by interest charges at the end of the promotional period, users should calculate the proper monthly payments to avoid charges.

Individuals who experience issues with their credit cards, including promotions, are encouraged to report these incidents to the CFPB’s consumer complaint database.

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