No Payments, No Interest -- Not Anymore!
Traditional no-interest, no-payment plans are going the way of the cassette tape.
Spurred by changes in federal law that become effective Feb. 22, retailers are adding minimum payment requirements, increasing warnings about the consequences of not paying off a balance after the promotional period expires and lengthening the amount of time these plans run.
This is due to the arrival of the Credit CARD Act, a landmark pro-consumer credit card industry reform package that also includes provisions applying to deferred-interest plans. While there was discussion about banning these plans outright, that didn't happen. Instead, Congress and the Federal Reserve took some smaller steps that allow retailers to continue to offer these plans, but require them to disclose the plan's terms more fully, apply payments in a certain sequence and offer the plans for certain time periods. Some retailers are also requiring minimum payments.
The major provisions of the Credit CARD Act take effect on Feb. 22, but the changes won't stop there. Changes to the Truth In Lending Act's Regulation Z -- which spells out what lenders must disclose when issuing credit cards or other loans -- are also set to take effect, though that won't happen until July 1.
The changes to deferred interest plans are significant, though consumer advocates hoped for more.
"From our perspective, there aren't enough changes," says Chi Chi Wu, a staff attorney with the National Consumer Law Center, a Boston-based nonprofit consumer advocacy group. "The fundamental problem is that even with more disclosures, how do you explain to someone in a really short period of time that there is no interest for six months, but if they fail to pay off the whole amount, then interest will be retroactively assessed to the date of purchase? That's a rather complex concept."
But it's one that consumers must grasp -- or else. "Interest on these plans is pretty high, so you could end up having 22, 25 or even 29% interest assessed on a purchase of a couple of thousand of dollars, which will then continue to accrue at the same high interest rate," says Lauren Bowne, a staff attorney with Consumer's Union, a nonprofit consumer advocacy group in New York.
Here's an overview of changes the new rules will bring to deferred interest plans and when they go into affect:
Plans must last at least six months. Until Feb. 22, retailers could offer deferred interest payment plans with terms shorter than six months, but after Feb. 22, such plans must run for a minimum of six months.
Ads can't say plans offer 0% APRs. From the consumer protection standpoint, one of the most important changes that will take effect Feb. 22 is how retailers can advertise these plans. "The Credit CARD Act is prohibiting retailers from disclosing a rate of 0% APR," says Bowne. "They can't disclose the rate at 0% because that is misleading. What the promotions do is actually waive payments of that interest rate, as long as consumers meet their obligations under the terms by paying the bill off in full by the end of the term."
This change will also show up on account solicitation materials and new account disclosures beginning July 1. "The Fed tweaked some of the disclosure rules," she says. "Retailers can't disclose the interest rate on these plans as 0% APR in the Schumer Box. They also have to include a disclosure in the monthly statement that tells people they will be liable for all the accrued interest if they don't pay on time." The Schumer box, named for New York Sen. Charles Schumer, must include consistent terms and conditions -- including APRs, default rates and other information -- so consumers can compare card offers.
Other specific changes in advertisements, including posters, in-store ads, solicitations, banner ads, envelopes and pop-up ads don't go into effect until July 1, under Regulation Z. "The rules require a caveat if advertisers use the term 'no-interest' in an ad -- there has to be a warning in the advertisement that interest must be paid in full by the end of the period." The additional disclosures don't apply to smaller ads, such as Internet banner ads and pop-ups or ads on the back of envelopes.
Statements must include warnings in last two months before payoff deadline. Under the Credit CARD Act, statements sent to the consumer during the last two months of the deferred interest payment plan must include a warning stating that if the total amount isn't paid off, interest charges from the date of purchase will apply. Statements must include both the interest rate at which interest will be assessed as well as the additional amount a consumer will have to pay if the final payment isn't paid by the plan deadline, she adds.
Sudden rate hikes banned. Under the Credit CARD Act, card issuers -- including retailers that sponsor deferred interest payment plans -- can no longer penalize consumers for being just a few days late with a payment by abruptly hiking their rates. Beginning on Feb. 22, consumers must be at least 60 days late before a higher rate can be applied.
"If you pay 60 days late, if you egregiously default, you could lose your deferred interest rate just like you can for any other rate," she adds. "So no more hair-trigger losses of deferred interest payment plans. As long as you pay your bill and make the minimum payment, even if it's a few days late, you won't lose the benefit of the deferred interest promotion."
Payment must be applied to highest rate first. If you use a store credit card for deferred interest payment plans and other purchases, retailers must apply your payments in a certain order beginning Feb. 22. Any payment you make on a card with different types of balances will first go to meet required minimum payments. Then, any excess after the minimum payment is satisfied has to go to the highest interest payment, except "during the last two months of a deferred interest payment plan, they must allocate the payment in excess of the minimum to that deferred interest rate balance, even if it isn't the highest interest rate," Bowne adds. "Also, at any time, you can call the card issuer and request that your payment in excess of the minimum payment be allocated to the deferred interest balance, even if it isn't the highest interest balance."
Some retailers asking for minimum paymentsWhile there is no explicit rule in the Credit CARD Act that requires minimum payments on deferred interest payment plans, some retailers are starting to require them. This is based on their interpretation of the rules, Wu says. Indeed, Mallory Duncan, a spokesman for the National Retail Foundation, a trade group for retailers, indicates that retailers are still sorting through the law and are not yet sure of all of its implications.
If a minimum payment is required, your statement will indicate what that payment is, so be sure to pay it by the due date. Otherwise, you'll have to pay penalties. Whether your plan requires a minimum payment or not, it's a good idea to make regular payments. If you don't, your balance will be that much larger and that much harder to pay off at the end of the deferred interest period, Wu says.
Retailers react to changesRetailers that offer these plans have begun sending out notices to consumers about how the new law will affect their deferred interest payment plans. Citi runs Macy's deferred interest payment plans and is currently "making a number of changes in the length of promotion plans and how payments are applied so that we are in full compliance with the law," says Citi spokesman Samuel Wang.
Macy's plans to continue to offer such plans and believes that consumers will continue to take advantage of them despite the new regulations. "Retail branded cards offer a number of features and benefits which will always make them attractive to consumers seeking value and flexibility," he continues.
Overall, retailers are relieved that the Federal Reserve and Congress didn't ban these plans outright, says Duncan. "The rules regarding deferred interest are better than those originally proposed," he says. "We're breathing a qualified sigh of relief because it seems like the Fed listened to our concerns and has allowed waived-interest plans to continue," he adds.
However, Rosemary Truman, managing partner of RHT Consulting, a financial services and credit card consulting company in Washington, D.C., believes that negative publicity, rising expenses and the new regulations may combine to make these plans less and less worthwhile for retailers, so consumers may be seeing fewer of these plans offered in coming years.
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