NEW CREDIT CARD RULES: NEGOTIATING THE INTRICACIES — MAKING THE RULES WORK FOR YOU (First in a Series)
Deferred Interest – Dead or Alive?
Many financial institutions use promotional offers to market their consumer credit cards and – especially in the case of private label cards – to increase the sales of their retail partners’ goods and services. The new rules on credit card practices (Regulation AA) and amended Regulation Z have cast a shadow upon the future viability of the many variations on the deferred interest theme – zero interest, no interest, interest free, 0% APR, waived interest or same as cash – with required minimum payments, no payments or fixed payments – for a certain number of billing cycles, months or days – and on purchases of a certain item or value – all premised on payment in full of the purchase price by a certain date. 74 Fed. Reg. 5498 (Jan. 29, 2009); 12 C.F.R. Parts 226, 227 (eff. July 1, 2010).
purchase price over time without having to pay interest – a “no brainer” deal for most consumers, especially when purchasing big-ticket items, the genesis of deferred interest plans. If payment in full is not made by the specified date, however, interest may begin to accrue on the balance of the purchase price or – more often than not – interest that has accrued on the purchase price since the transaction date will be posted to the account. Moreover, some deferred interest plans revert to standard revolving credit plans if the consumer does not adhere to account terms, such as, for example, making any late payment on the account. Ergo, the “hair trigger” that causes a “surprise increase in the cost of a completed transaction,” which the new rule on increasing interest rates is intended to prevent. 74 Fed. Reg. at 5527-28. Cost increase? Perhaps. But a surprise? Not if deferred interest plans are disclosed in accordance with current Regulation Z rules and federal agency guidance.
So, we wonder, why change the deferred interest rules? And do these changes mean deferred interest plans will be dead as of July 2010? Well, actually, the rules have not changed so as to eliminate deferred interest plans … really. But the landscape has changed, expectations have changed, “hair triggers” will be gone, and issuers need to re-examine, but not necessarily abandon, their deferred interest plans. So, we would argue, deferred interest plans need not die. And because they benefit all parties – consumers, issuers, retailers – they deserve to live on. So, if you want to breathe life back into your deferred interest plans, fair dealing and full disclosure is – always has been – the key.
- Judy Scheiderer and Margaret Stolar