CFPB Crackdown on Deferred Interest Will Have Major Repercussions for Investors

The writing is clearly on the wall for any company that offers deferred interest financing, following the Consumer Financial Protection Bureau’s announcement that GE Capital GE must refund as much as $34.1 million to customers who fell victim to its deceptive credit card enrollment tactics. That’s big news for investors because a number of major banks and roughly half of the major retailers that offer financing plans use deferred interest, according to a recent CardHub study.

Deferred interest is a bait-and-switch financing gimmick that lures consumers with the appeal of a 0% introductory interest rate, yet allows finance charges to be retroactively assessed to the original purchase amount if a card holder misses a single payment or fails to pay off their full balance by the end of the intro term. In contrast, traditional 0% credit card offers apply interest only to whatever balance remains at the time regular rates take effect. 

It’s often hard for consumers to tell the difference between the two types of financing arrangements because 41% of the companies that use deferred interest do not clearly disclose that fact, instead hiding the deferred nature of things in fine print. The result is an environment in which unsuspecting consumers can easily see their financing costs increase by more than 27 times simply as a result of paying a day late.  I’m sure you can imagine how unwelcome a surprise that must be.

The objective for investors is to avoid being fooled as well. Deferred interest financing obviously provides sticker appeal and is effective in boosting short-term revenue as well as outstanding balances – both of which are key metrics for evaluating a company. However, you also have to worry about the resulting consumer backlash as well as the sustainability of a business model based on trickery. 

The personal finance industry, and the credit card space in particular, has made big strides toward transparency since the Great Recession, and regulators seem to have put deferred interest in their crosshairs. 

“Deferred-interest products can be risky for consumers in the best of circumstances,” CFPB Director Richard Cordray said in announcing the penalties levied against GE and its subsidiary CareCredit. “In October, we issued a report to Congress on the CARD Act and the credit card market, and we identified deferred-interest products as an area of concern. … We will continue to monitor these products carefully, and most especially we will not tolerate financial companies that take advantage of patients and their loved ones.”

So, which big-name companies are in for a rude awakening when deferred interest is finally done away with?  The major retailers in the deferred interest game – a list that includes the likes of Apple AAPL, Best Buy BBY, and Amazon AMZN – are laid out in the infographic below.  The financial institutions that most actively facilitate their deception are Citi C and – surprise, surprise – GE Capital.

At the end of the day, recent deferred interest developments merely underscore the importance of looking beyond the metrics when evaluating a company and instead questioning how a business makes its money as well as for how long it can reasonably expect to do so. After all, things always seem alright until they aren’t, and you don’t want to be the one left holding the liability when the music ultimately stops.

Odysseas Papadimitriou is CEO of the personal finance websites WalletHub & CardHub.  He previously served as a senior director in Capital One’s credit card department.