Several years ago the U.S. Congress created a new entity called the Consumer Financial Protection Bureau (CFPB). This is a very powerful federal agency and its existence continues to be controversial. However, it has certainly been responsible for some positive changes since it was created. For example, thanks to the CFPB you can no longer be pushed into a higher-priced loan by a mortgage lender, new homeowners are less likely to be pushed into foreclosure, student lenders are getting more closely scrutinized, and if you’re scammed by a credit card company you can get a refund.
Risky credit card practices
The CFPB just released a report that included concerns about risky practices the credit card companies are doing that could be costing you money. We as a nation are addicted to those little pieces of plastic. And the banks love them because credit cards continue to be their most profitable lending business. In fact, banks earned more than four times on them than the average return on their assets.
They make it so easy
Credit cards have become immensely popular because they represent such an easy way to shop, access credit, borrow money and earn rewards. According to the data from Gallup.com, the average credit card user has four cards in his or her wallet. All told Americans have $3.5 trillion in credit card limits, which is an increase since 2012 of 10%. The fact is that Americans of all credit scores are opening more credit cards, borrowing more and spending more.
In reviewing credit card practices the Consumer Financial Protection Bureau found five it worries about the most. They are:
You pay much more for a subprime credit card
Most of the major credit card issuers don’t actively target subprime customers or those people with credit scores less than 600. Instead, banks have a wide range of interest rates depending on credit scores. Most of them range from 12.99% to 22.99%. What this translates into is that if you have a low credit score you will most likely be charged the 22.99%.
However, there are some companies that target subprime customers specifically with much higher interest rates. As an example of this, the First Premier Bank has a credit card with an interest rate of 36%. Plus, it charges an annual fee of $75 and a one-time processing fee of $95. Then there’s a monthly servicing fee on top of this.
When the CFPB reviewed this data it found a dramatic price differential between mass-market credit card issuers and the companies specializing in subprime consumers. At the mass-market banks, the total cost of credit for deep subprime customers was 22% while at subprime specialist companies it was 41%. And, worst of all, these customers had the same scores.
One problem is that those 0% interest offers may not be really 0% interest offers. The CFPB found that a lot of customers don’t understand the big difference between waived interest and deferred interest. Deferred interest is where you’re not required to pay any interest until your promotional period ends. However, if you don’t pay off your balance in full before it comes to an end you will be hit retroactively with all of the interest that accumulated during all the months of your promotional period. This means you never actually received a 0% interest offer at all. Deferred interest promotions have increased 21% since 2010 and for good reason – the banks love them.
A deferred interest credit card can be a good deal if you need to make a large purchase and pay off the entire balance during the promotional period. When you do this it’s like getting free money. And it’s hard to beat free. On the other hand, if you shop around carefully you might be able to get a waived interest offer. There currently is 0% interest waved offers for up to 21 months. You can find them updated daily and websites like Magnify Money and Nerd Wallet.
Rewards programs have terms that are difficult to understand
When selecting a new credit card most consumers opt for one with a rewards program. However, the CFPB has found that some of the rewards programs are complex and do not provide complete disclosure. The market for rewards cards has heated up in the past few years. As of this writing, there are introductory offers where you could easily earn 50,000 bonus points. The rates on cash back cards have been increasing so that 2% cash back cards are very easy to find. And the major credit card issuers are also making redemptions easier. As an example of this, Discover recently took $178 million charges when it removed its threshold for a minimum redemption.
The CFPB is not concerned about limiting credit card benefits but about clear and uniform disclosure. For example, if you have a card where there’s a minimum redemption threshold you should know about this up front.
Debt collection can be a problem
The majority of the credit card issuers sell their past-due debts to third-party debt collection agencies. These agencies continue to generate a lot of complaints for the CFPB. The biggest problem is that collection practices vary dramatically between collection agencies. As an example of this, some do not allow any voicemail messages while others allowed two per day per account. There are also agencies that limit calls to four attempted calls per day whereas others allow 15. The CFPB is concerned about the differences in these business practices as well as the completeness and accuracy of the information the collection agencies keep.
If you’re being aggressively hounded by a debt collector and are not sure of your rights go to the CFPB’s website where you will find a list of what debt collectors are not allowed to do. The site also has sample letters and scripts you might find useful.
There are lengthy and complex agreements
The CFPB also learned that most credit card agreements are still complex and lengthy. In fact, it found some that totaled 8000 words. The cards’ agreements and disclosures are very difficult to understand and often in fine print. If you’re considering a new credit card you might want to go to its website and search for its terms and conditions. Many of the credit card issuers now present this information in a more understandable form. For example, Barclaycard’s terms and conditions are presented in a table format and in very clear language.
So what’s next?
It’s easy to tell from this report what the CFPB’s priorities are. Given this, you can expect to see some regulatory action on some or all of these topics in the very near future.