SALE! BOGO! DOORBUSTER!: Running Promotions on Your Credit Cards
In my opinion, the first Sunday after the Super Bowl is the most depressing day of the year. After months of having every Sunday filled with excitement and record-breaking moments, you suddenly have a day with nothing to do. And that's just depressing. So, I filled my day with a trip to the mall. Pause – I'll give you all a moment to recover from the shock that there's still someone out there who doesn't shop online. . . I always prefer the mall because most of the stores are so desperate to get people in the door that they give you really great discounts that you often can't get online. They all have these colorful signs in the windows advertising discounts on your entire purchase or free gifts with your purchase.
Like any other business, credit unions also use these kinds of flashy offers to attract customers. However, unlike the stores at the mall, credit unions have to comply with a number of different requirements for their offers. From advertising to account opening and beyond, the rules are complex and can be hard to follow. Today's post will focus on the rules for how long credit unions must honor a promotional rate on a credit card. The rules below apply for both new accounts and promotions on existing accounts.
Generally speaking, the credit card rules in Regulation Z prohibit credit unions from increasing the rate on a credit card unless a specific exception applies. One of those exceptions – contained in section 1026.55(b)(1) – allows credit unions to increase the rate after the expiration of a promotional period. The promotional period must be at least six months. Well, that's pretty easy, right? Not so fast. The commentary actually provides two different methods for calculating the promotional period depending on the types of transactions subject to the promotional rate – multiple transactions or one-time transactions.
Multiple Transactions. The first method covers promotional rates that apply to multiple transactions. For example, all purchases made between February and September. Credit unions may limit the types of transactions that qualify for the promotional rate to particular categories – such as all purchases or a balance transfer over $1,000 – or a particular time period – such as all purchase made in December. If the promotional rate applies to multiple transactions, it does not matter how many transactions the member actually makes – as long as multiple transactions qualify for the promotional rate than the first method applies.
So, what is the calculation method? Well, the promotional period begins on the date the credit union provides the 55(b)(1) disclosures – that is, the disclosures that explain the length of the promotional period and the APR that will apply after the end of the promotional period. However, if the date the account can first be used is later than the date the credit union provided the disclosures, then the promotional period begins on that date instead. The promotional period must end at least six months from that beginning date. Here is an example from the commentary that illustrates how this works:
On November 1, 2017 the card issuer offers the consumer a 0% rate for six months on purchases made during the months of November and December and states that a 17% rate will apply after the promotion. The following purchases are made: November 15 for $500; December 15 for $300; and January 15 for $150. The card issuer may begin charging the 17% rate on the $500 purchase and the $300 purchase starting on May 1, 2018 as this is six months from November 1. However, the issuer may charge the 17% rate on the $150 purchase beginning on January 15 since it was made after the specified time period.
One-time transactions. The second method covers promotional rates that will apply to only one transaction. For example, a balance transfer. Again, credit unions can put limitations on the transaction that will qualify for the promotional rate – such as a purchase over $5,000 or a balance transfer made in January. When the promotional rate applies only to one-time transactions, then the promotional period begins on the date of that transaction. The promotional period must end at least six months from that transaction date. Here are a couple examples from the commentary that illustrate how this works:
Example 1: On June 1, 2017, a card issuer offers a 0% APR for six months on the purchase of an appliance and an 18% rate will apply after that. On September 1, 2017 a $5,000 appliance is purchased. The card issuer may begin charging the 18% rate on March 1, 2018 as this is six months from September 1.
Example 2: On June 1, 2017, a card issuer offers the consumer a 5% rate for six months on a balance transfer of at least $1,000 and states that a 15% rate will apply after that. On June 15, a $3,000 balance is transferred to the account. On July 15, a $200 purchase is charged to the account. The card issuer may begin charging the 15% rate on the $3,000 transferred balance on December 15 as this is six months from June 15. However, the card issuer may charge the 15% rate on the $200 purchase beginning on July 15 because this purchase did not qualify for the promotional rate.
When dealing with promotional rates, credit unions will need to first determine whether the promotional rate will apply to multiple transactions or only to one particular transaction. Once the credit union has made this determination, it can determine when the promotional period starts. Determining when the promotional period starts is essential for compliance as the period must run for at least six months.
About the Author
Jennifer Aguilar, NCCO, joined NAFCU as regulatory compliance counsel in February 2017 and was named Senior Regulatory Compliance Counsel in March 2019. In this role, Aguilar helps credit unions with a variety of compliance issues.