Capital One sent the checks to credit card holders, offering them a starting rate of 5.99% fixed APR that would drop after October 2007 to a 4.99% APR. What Capital One did not tell consumers was that any purchases made with those checks would automatically be paid off first.
This goes against the "last in-first out" payment application that consumers are used to. "Last in-first out" means that credit card payments are applied to purchases in order of most recent to least recent. The last purchase made on a credit card should be the first purchase paid off.
However, Capital One applied payments differently and did not warn customers it was doing so. Capital One in fact applied all payments to the check transactions first, and only applied payments to other purchases once the check transactions were paid off, regardless of the order of purchases. Check transactions made with the "hassle-free holiday" checks had a much lower interest rate than regular credit card transactions for many customers and therefore made the company less money than purchases made at the higher interest rate. Because low interest purchases were paid off first, higher interest transactions sat on the credit card for longer than they should have and continued accruing interest. Meanwhile lower interest purchases were paid off more quickly than they should have been. In the end, customers paid more in interest charges than they should have, had their purchases been paid off in the "last in-first out" method that consumers are used to.
Despite their advertisements showing customers that manage to avoid high fees by using Capital One credit cards, Capital One has actually faced lawsuits over their high fees.
Back in 2005, the Attorney General of West Virginia, Darrell McGraw, filed suits to enforce subpoenas given to Capital One Back. The subpoenas had been issued because of investigations into Capital One's marketing, products, services, and debt collection practices. The investigation began after consumer complaints that despite receiving pre-approved offers of credit cards up to $5,000, Capital One sent credit cards with limits of only $200-$300. Additionally, the cards with these low limits had high fees, including a $59 annual fee, a late fee of $29 dollars and an over-limit fee of $29. Customers who received a $200 credit card and used it right away to make a purchase of over $141 would automatically be over-limit because their first statement included the $59 annual fee.
Capital One has also come under fire for reporting practices that damage a consumer's credit rating. The problem is that Capital One refuses to report a customer's credit limit, but will give the amount that the customer owes, making it appear that the customer is at the limit of his or her credit card. For example, a customer with a credit limit of $3000 but a balance of $700 is well below his or her limit. But the credit agencies only see the $700, not the $3,000 limit, and assess the customer at a lower credit rating than he or she deserves. The lower credit rating could translate into denied credit applications and/or higher interest rates on credit cards and loans.
When Capital One sent out its promotional checks in 2006, consumers should have been notified that their payments would not be applied to purchases in the usual manner. Customers who used the "hassle-free checks" may be eligible for compensation because they unknowingly paid too much interest on their credit cards.