The offers stuffing your mailbox can sound enticing: Transfer a balance from a high-rate credit card to a new card and pay no interest for six months, a year or even longer.
If you’ve been struggling to pay off credit card debt, such offers can help you pay off your balance, at no cost, over time — assuming you can actually afford to pay the full amount by the end of the promotional period. But the offers can carry other risks that consumers may not fully understand.
For instance, say you transfer a balance to a new card, or make a big purchase that comes with a zero or low-rate offer. If you then also make additional purchases with the new card, you’ll often pay the card’s full interest rate on the new charges, right away; there’s no “grace” period when you’re not charged interest, since you’re already carrying a balance on the card. (Grace periods generally are available for customers who pay their cards in full each month, instead of carrying a balance.)
All this can catch consumers off guard, which is why the Consumer Financial Protection Bureau on Wednesday warned banks and other finance companies against deceptive marketing of such offers. In a special bulletin, the bureau, which was created by the Dodd-Frank financial law, said it was concerned that some card companies were drawing consumers in with offers of low or no interest, and then charging them “surprise” interest.
“Credit card offers that lure in consumers and then hit them with surprise charges are against the law,” the bureau’s director, Richard Cordray, said in a statement, adding that the bureau expects card companies to clearly disclose to consumers how the promotional offers work.
The bureau did not name specific card companies, but suggested that such offers were common.
“Providing clear and transparent disclosures so customers are fully informed is one of our industry’s top priorities,” Nessa Feddis, the American Bankers Association’s deputy chief counsel for consumer protection and payments, said in an emailed statement. She added, “We are always willing to work with our customers to address any concerns they have about their accounts.”
Gerri Detweiler, director of consumer education at Credit.com, said the ins and outs of promotional interest rates and grace periods have often been a source of confusion for consumers. Some cards do a good job of clearly alerting prospective customers that they will incur interest if they make additional purchases with promotional offers, she said, but others are less straightforward.
Here are some questions about credit card interest rate promotions:
■ How can I avoid paying interest on a balance I transfer to a new card?
Don’t use the new card to make new purchases until you’ve paid off the promotional balance. Instead, the consumer bureau suggests, consider shopping for other items with cash, a debit card or another credit card that doesn’t have a balance.
Ms. Detweiler also advises scouring the details of any promotional offer, so you’ll know what may trigger interest payments — and what interest rate you’ll pay. For instance, if you transfer a balance to a new card but then miss a payment or pay late, you’ll probably lose the lower interest rate. Also, if you fail to pay off the balance by the end of the promotional period, you’ll owe interest on any balance remaining. (Some finance companies, such as those that offer cards for furniture or electronics chains, may even charge interest — at a much higher rate — on the full balance retroactively if the balance isn’t paid in full by the end of the promotional period.)
■ Are there any fees associated with balance transfers?
Cards usually charge a fee — typically 3 percent of the transferred amount — for balance transfers. In the past, the fee was often capped at around $75. But Ms. Detweiler says you should look closely, because many cards have done away with those maximum limits and simply charge a percentage of the full balance. That means “transfer fees have gotten higher,” she said.
■ Will using balance transfer offers affect my credit rating?
Possibly. If you transfer a large balance, and it uses up most of the available credit on the new card, that could hurt your score until you pay down the balance, Ms. Detweiler said.
Originally published in the New York Times, here