0% Interest!* Is Your Advertising Sending The Wrong Message? (*Kind Of)

Deferred and waived interest programs, convenience checks, promotional rates, and grace periods are popular credit card features with consumer, creditors, and retailers - as well as the Consumer Financial Protection Bureau (CFPB). Last year the CFPB signaled to the industry that it had concerns about use of these loan features and doubts regarding consumer understanding of the proper use of credit containing these features. Earlier this week the CFPB issued Bulletin 2014-02, which provides more detailed guidance on the marketing of grace periods and promotional rates for credit cards.

It is important to keep in mind that although the Bulletin was directed to credit card issuers and credit card programs, it should serve as a lesson for any creditor that offers credit with similar features. Any creditor that offers deferred or waived interest programs should incorporate this guidance into their policies and procedures.

What is a Grace Period?

Based on its studies, the CFPB believes that many consumers cannot accurately define what the "grace period" is on their credit cards. Regulation Z defines a "grace period" as:

The date by which or the period within which any credit extended may be repaid without incurring a finance charge due to a periodic interest rate and any conditions on the availability of the grace period. (12 C.F.R. § 1026.5.)

In practical terms, this means if a consumer's credit account carries a balance, he will not have a grace period and will incur finance charges - even if the consumer pays off a new purchase. This is best demonstrated by way of example.

March 1 - Consumer makes a $1,500 purchase (has unpaid balance of $100) March 15 - Billing cycle closes April 6 - Payment due date April 5 - Consumer pays off $1,500 purchase Because the consumer had an outstanding balance, he does not have a grace period. His next periodic statement will include finance charges on a balance of $1,600 going back to the original purchase date, plus finance charges on the remaining balance of $100 through the end of the billing cycle.

Regulation Z requires credit card issuers to disclose the grace period in four points during the customer relationship using prescribed "safe harbor" language: (i) on or with solicitations or applications to open a credit card account; (ii) at account opening; (iii) on periodic statements; and (iv) with checks that can be used to access a credit card account. Even...

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