U.S. watchdog plans to crack down on 'bait and switch' credit card rewards

The Consumer Financial Protection Bureau (CFPB) wants to throw a lifeline to borrowers who fell prey to deceptive credit card rewards programs.

The CFPB says that an increasingly oligopolized credit card market is using bait-and-switch rewards programs to deceive and lock in borrowers.

To address this, the watchdog is finalizing a rule that will let borrowers switch between credit providers with more ease.

"The rule activates a dormant authority under Section 1033 of the Consumer Financial Protection Act, which gives consumers rights to access their data. It will help innovative firms of all sizes gain customers, by offering better services and more favorable rates," said the CFPB.

The timing for such a rule couldn't be better. In 2022 (the latest available data), borrowers doled out $130 billion in interest and fees on credit cards alone.

What's more alarming is that many are paying more on interest and fees than the principal balance—robbing them of the opportunity to get out of debt to begin with.

Despite holding a record debt balance, consumers continue to spend, perpetuating a cycle of debt that has spiraled out of control and shows little sign of improving.

Oligopolized credit market

While there are several thousand banks and credit unions in the U.S., only a few dozen dominate most revolved credit accounts. This worries the CFPB.

“One factor driving this concentration is that it is currently very difficult for consumers to shop for credit cards by comparing interest rates,” the agency stated.

Over the last ten years, the gap has widened between the prime rate (based on the Fed Funds rate) and the average APR that card issuers charge for purchases.

In 2023, that margin was 14.3% compared with 9.6% in 2013, translating to $25 billion in additional interest charged by credit card companies last year alone.

For borrowers with revolving balances, this amounts to roughly $250 in annual charges, placing more profits in the pockets of the card issuers.

Instead of interest rates, consumers tend to choose credit cards based on other features like annual fees, convenience, or rewards, the latter of which has raised regulatory eyebrows.

Of course, borrower perks like cashback, signup bonuses, airline miles, points, and more can amount to hundreds, if not thousands, of dollars annually per household.

To make these programs viable, the CFPB believes some credit card issuers are quietly passing the costs of perks to the borrowers themselves through higher fees and interest.

The bottom line is that rewards often fail to offset the extra fees and interest paid by borrowers with revolving balances.

Even if rewards are awarded as promised, consumers might have been better off choosing a credit card with a lower interest rate if they only knew where to find one.

Among the proposed rules, the CFPB seeks to force third-party comparison sites to use standardized pricing data so that borrowers can make more informed decisions.

Spending spree

Credit card issuers might need to become more transparent on pricing, but consumer spending habits could be emboldening them in the first place.

While debt levels are rising, as evidenced by a $212 billion rise in U.S. household consumer debt in Q4 2023 to $17.5 trillion, so is spending, fueled in part by impulse buys.

Credit cards are largely to blame, according to TD Economics economist Shernette McLoud.

“The U.S. economy is currently performing better than most forecasters expected a year ago, thanks in large part to a resilient consumer,” McLoud said.

“However, more recently that spending is increasingly being financed by credit cards.”