CFPB Warns Against “True Cost” of Credit Card Promotions

It’s no secret at the ReadyForZero office that math isn’t my strongest subject (though I’m on a mission to never say “I’m bad at math” again). I’m fine with basic math and budgeting, but as soon as I have to start calculating deferred interest, compound interest, and the like, my brain wants to shut down. That’s how just a few years ago I almost got into trouble with a balance transfer credit card…

My Credit Card Balance Transfer Story
When I had credit card debt, I didn’t fully understand how detrimental high interest rates could really be. I paid over the minimum every month but didn’t have a targeted payoff plan or date. I never saw the impact of my payments and for years my number didn’t budge.
I didn’t love the idea of a balance transfer credit card originally – all I wanted was a loan with a fixed interest rate and payoff date so I could rest easy knowing exactly when and how I’d become debt-free. But I took advice from others and did the balance transfer instead to get the 0% interest rate.
My worst mistake was that I stopped there. I didn’t have a plan to pay off the card before the promotion ended and I made a purchase, which changed the way my payments would be applied thanks to the purchase interest rate. In short, I completely negated the benefits of the balance transfer credit card.

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Why the CFPB is Cracking Down on Credit Card Companies Offering Balance Transfers
My mistakes with the balance transfer credit card were wholly my own – but could things have gone differently if I had been more educated from the beginning? No question.
I’m not alone in the mistakes I made (not making a plan and not understanding the additional fees of a balance transfer) and the CFPB has taken notice of the problem:
“’Credit card offers that lure in consumers and then hit them with surprise charges are against the law,’ said CFPB Director Richard Cordray in a press release. ‘Before they sign up, consumers need to understand the true cost of these promotions. Today, we are putting credit card companies on notice that we expect them to clearly disclose how these promotional offers apply to consumers so that they can make informed choices about their credit card use.’” — Collections&CreditRisk
Not all credit card companies offering balance transfers hide these fees – and I’d argue that the fee for the transfer itself is often plainly stated. The fees that are often hidden are: purchase interest rates and retroactive interest charges.
Purchase interest rate: The rate charged for a purchase on a credit card – often higher than the promotional interest rate given for a balance transfer. (In other words, purchases made on a balance transfer credit card are often subject to a higher interest rate.)
Retroactive interest charge: After an interest rate increases, the outstanding balance is charged a fee at the new interest rate and that fee is tacked onto the total balance of the credit card. (In other words, if you reach the end of your introductory period and the interest rate goes up, your entire balance may be charged a fee at the new interest rate.)
Whether a consumer knows about this before signing on the dotted line varies per credit card company and how the consumer signs up (online – meaning they’d have to review all documentation to learn about fees – or with someone face to face to explain it all). But the CFPB is working to make sure that these and any other “hidden” fees are crystal clear with all balance transfer credit cards:
“’The bureau expects credit card issuers to incorporate into their compliance management systems adequate measures to prevent violation of federal consumer financial laws, including the Dodd-Frank Act’s prohibitions on unfair, deceptive, or abusive acts or practices,’” the bulletin said. “’Consequently, credit card issuers are expected to implement internal controls sufficient to ensure that they market promotional APR offers in a manner that limits the risk of statutory or regulatory violations and related consumer harm.’” — Collections&CreditRisk
The Positives and Pitfalls of Credit Card Balance Transfers
When used properly, balance transfers can be a useful debt payoff tool. However, if approached without knowing the pitfalls, they can lead to an even longer cycle of debt.
When a credit card balance transfer goes right:

You’ve calculated the fees of the transfer and they are proven to be lower than the interest you’ll pay on your current debt to ensure they’re worth it
You can reasonably pay off the debt before the transfer expires (or at least make meaningful progress)
You calculate exactly how much you would need to pay each month to pay it off before it expires and get as close to that number as you can
You don’t make any new purchases on that card
You create a budget that allows you to stop relying on credit (including cut-backs if need be) so that you can be sure you’re not taking on any debt while you work to pay this debt off

When a credit card balance transfer goes wrong:

You take out the balance transfer with no meaningful plan to pay off the debt before the interest rate goes up; so you take out another transfer, and another, and another (this can go on for years)
The fees to initiate the balance transfer are too high to make up for the savings in interest
You make a purchase using your balance transfer credit card and suddenly the interest starts piling on again (often in ways that are hard to understand by simply reading the bill)
You rely on credit without paying it off each month, thus ensuring that you’re continuing down the debt path while trying to pay off this card

My first time with a balance transfer credit card didn’t go well at all. But, my second time (with a better understanding of how to make it work), was the key that led me to paying off my credit card debt quicker than I’d even hoped for.
I was approved for 18 months at no interest (thanks to my long history with the bank I decided to go with for this purpose) and calculated how much to pay each month to pay it off before that rate went up. I then avoided making new purchase and actually beat my 18 month deadline! Just like any other financial tool, this can work if done with a lot of education and a solid plan.
Image Credit: Rupert Ganzer

This post was published by Shannon, Community and Customer Support Manager for » ReadyForZero.
ReadyForZero is a company that helps people get out of debt on their own with a simple and free online tool that can automate and track your debt paydown.


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