How US Debt Slaves Get Trapped by “Deferred Interest”

by Wolf Richter, Wolf Street:

But over the next 2 months, they’ll try to prop up US retailers and the entire global economy.

Credit cards play a huge role in what the US retail industry hopes will be a $682-billion splurge by Americans over the holiday selling season. Already, total revolving consumer credit outstanding – mostly credit cards – has reached $1 trillion, up 5.4% from a year ago, and will surge over the next two months, as US consumers try to prop up the global economy by going deeper into debt.

So the consumer finance industry is proffering its services via store-branded credit cards to make this happen. It’s not doing this for the love of the US economy but to extract its pound of flesh from consumers who don’t make enough money to pay off their credit card balances every month – the very debt slaves that carry the $1 trillion on their backs – and who don’t read the fine print. For them, the finance industry has a special money extraction tool: “deferred interest.”

When consumers are at the cashier or online, they may get offers of 0%-financing and a discount on the first purchase if they sign up for a store-branded credit card on the spot. A study by WalletHub of the financing options offered online by 75 large US retailers found that all retailers that offer store-branded cards with 0% financing use “deferred interest” clauses:

Deferred-interest financing is like a wolf in a sheep’s clothing, pairing an enticing offer – something like “no interest if paid in full” or “special financing” – with a clause that allows the deal to turn ugly if you make the slightest mistake. Paying your bill a day late or owing even $1 when the promotional period ends would enable the issuer to retroactively apply finance charges to your entire original purchase amount, as if the intro rate never existed.

These “deferred interest” clauses are “commonly found in the fine print of retailer payment plans,” it says. They’re easily overlooked in the heat of the checkout battle. But they specify that high interest rates – up to 29.99% among the credit cards studied – may be applied retroactively to the full purchase amount back to the purchase date if one of these two common things happens:

  • Customer misses a monthly payment, or
  • Customer doesn’t repay the full balance within the 0% intro period.

When WalletHub surveyed consumers, 53% said that the biggest draw of a store-branded credit card is 0% financing.

But of those consumers who understood how deferred interest works, 61% said it’s unfair, 50% said it should be illegal, and 67% said they wouldn’t sign up for such a plan.

WalletHub found that 88% of all deferred-interest credit cards in its study were issued by just three banks:

  • Synchrony Bank, which GE spun off in 2015 (32%)
  • Comenity & Comenity Capital Bank (32%)
  • Citibank (24%)

The regular interest rate that is applied retroactively on the original purchase amount ranges from a low of 8% APR to a high of 29.99% APR (at Zales, among others), with the most common range being between 15% and 25%.

Even the low end (8%) of this absurd scale is already high in this low-interest rate environment. But charging nearly 30% APR, when banks pay depositors between 0% and 1.25%, and applying this sky-high rate retroactively under certain conditions to purchases made with “0% financing” shows the extent of the broader interest-rate rip-off.

The disclosures on deferred interest, including when and under what conditions the regular APR kicks in retroactively back to the purchase date, are often hard to find. So WalletHub came up with a “transparency score,” ranging from 0 to 10:

Generally, these two key pieces of information are present somewhere on the retailers’ websites or online disclosures. However, in many cases, the information was difficult to locate and understand. Since most consumers do not look far beyond a tag line advertising, “0% interest,” “no interest if paid in 12 months,” or “special financing for 6 months,” for example, the farther away the key information was from the tag line, the more misleading we considered it to be.

Additionally, we considered the size of the font used to list the key terms in determining the “readability” factor. If the information was buried in a terms and conditions page, readability was automatically scored at zero since the size of the font does not matter if the consumer has very little chance of finding the information.

In WalletHub’s “transparency score,” a number of retailers scored a “10,” including Apple, Kay Jewelers, Home Depot, and Dell. Others were scattered across the spectrum. Pottery Barn and West Elm scored a “0.” They were “the least transparent retailers regarding the use of deferred interest for the second consecutive year.”

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