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CFPB: Discover to refund $200M

By Janna Herron · Bankrate.com
Monday, September 24, 2012
Posted: 4 pm ET

The CFPB does it again.

The federal consumer watchdog ordered Discover to pay back $200 million to 3.5 million credit card holders for deceptively selling extra services. It also levied a $14 million penalty on the issuer.

The move marks the second enforcement action by the Consumer Financial Protection Bureau, which was created last year. In July, it handed down a similar order to Capital One.

The CFPB said Monday that Discover representatives misled consumers to think the four credit card add-on products -- payment protection, credit score tracking, identity theft protection and wallet protection -- were free when they weren't. Discover customer reps also withheld the requirements to be eligible for payment protection, enrolled some consumers without consent and spoke unusually fast when explaining the product fees and terms.

Discover must change its marketing of these products and submit a compliance plan to the CFPB and the Federal Deposit Insurance Corp. for approval. Current Discover cardholders who were affected will get a credit on their credit card account. Former cardholders will receive a check in the mail.

The action hasn't dissuaded the issuer from selling the add-on products, however. Company spokesman Jon Drummond said in an email that "Discover's current intention is to continue to offer and market" them.

"These are called 'enhancement' services, and they're named as such because they enhance the bottom line of the credit card issuers," says John Ulzheimer, president of consumer education at SmartCredit.com. "It's another way of monetizing cardholders."

Consumers paid $2.4 billion for payment protection alone in 2009, according to a March 2011 government report. And Drummond said Discover pocketed $428 million from these add-on products last year.

The CFPB has targeted these add-on products. It told Capital One in July to refund $150 million to its customers and handed down a $25 million penalty. Shortly after that, Bank of America said it will stop selling these products voluntarily. Other credit companies remain under the CFPB's microscope, such as American Express.

The add-on products offer insurance-type ID protection. For example, payment protection plans generally put payments on hold for a period after a life-changing event, such as a medical emergency or job loss. Credit-tracking plans give consumers access to their credit reports and credit scores. Identity theft protection monitors credit files daily for suspicious activity, while wallet protection plans help cancel credit cards after a wallet is lost or stolen.

In general, none of these are worth their fees, no matter how they are marketed.

"They’re easy products to offer and market. And they're priced very generously," says Bill McCracken, CEO of market research firm Synergistics Research, "from an issuer's standpoint."

Instead of payment protection, McCracken suggests other, cheaper protection to cover bills after a major setback. Get adequate life and disability coverage. Be your own insurance, too. Sock away extra cash and build an emergency fund that can cover six months of expenses. And start paying down any revolving credit card debt now, when life is good and the paychecks are coming.

Monitor your own credit by pulling your credit report for free every 12 months from each of the major credit reporting bureaus. Ward off ID theft by tracking credit card charges online and reporting any unusual transaction to your issuer and the credit bureaus. Last, keep a list of your credit card issuers and bank phone numbers at home in case your wallet is lost or stolen.

Have you bought an add-on credit card service? Was it worth it?

Follow me on Twitter: @JannaHerron

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