He added that some customers had discovered the fact only after being charged for late fees or having received debt-collection calls.
In addition, the company is accused of failing to provide up to $10 worth of credit towards purchases, as promised in its adverts.
"PayPal [also] failed to post payments properly, lost payment checks and mishandled billing disputes that consumers had with merchants or the company itself," Mr Cordray added.
The proposed settlement states that the company will set up a $15m fund to compensate affected customers and pay a further $10m fine to the bureau.
"PayPal Credit takes consumer protection very seriously,' the California-based company said in a statement.
"Our focus is on ease of use, clarity and providing high-quality products that are useful to consumers and are in compliance with applicable laws."
PayPal Credit is also offered to users outside the US,
A spokeswoman for the UK's Financial Conduct Authority said she was unable to comment on whether or not it was carrying out an investigation of its own.
However, PayPal said it did not expect a follow-up probe.
"UK members have not been affected by the issues raised in connection with this CFPB investigation," a spokeswoman for the firm told the BBC.
This is the second time PayPal has been penalised by the US government in recent months.
In March, it agreed to pay $7.7m to the US Treasury following claims it had allowed payments that violated sanctions against Iran, Cuba and Sudan.