For many consumers, a credit card that offers deferred interest seems like a smart way to finance a large purchase like a new sofa or an engagement ring. However, it seems that many consumers are unsure what deferred interest actually means, and are unaware of the hidden dangers of deferred interest. According to a recent WalletHub survey, 82 percent of Americans don’t understand how deferred interest works.
As with any credit product, deferred interest credit cards must be used carefully to avoid a debt trap that may be hard to escape from. Keep reading to learn more about deferred interest, why it is dangerous, and what you can do to protect yourself.
What exactly is deferred interest and why is it dangerous?
Deferred interest is a delay in interest charges on a credit account for a set number of months. If the balance is paid in full at the end of the period, no interest will be charged.
However, if the balance is not paid off by the end of the promotional period, interest will be charged retroactively. Even a remaining balance of just a few dollars can result in a significant interest charge.
For example, let’s say I want to buy a new TV for $1,200. The store I want to buy it from offers an attractive deal if I open a store credit card: Zero percent interest for 12 months. I think this sounds great, so I sign up for the store-branded credit card (more on that in a minute) and get my cool new TV.
If I’ve paid off my TV by the end of the 12 months, I owe no interest, and it was as though the store gave me a zero interest loan. But, if I have any balance at all at the end of the deferred interest period, even so much as one cent, or if I miss a minimum monthly payment during my deferred interest period, I owe interest on the entirety of the balance for every month during that special offer period. Given that most store credit cards come with very high interest rates, not paying it off in full would be flirting with financial disaster.
One way that deferred interest is particularly dangerous for consumers is that it makes it easy to overspend. When you don’t see interest charges on your monthly statement, it can give a false sense of security, when in reality a high-interest charge lingers on the horizon for as long as there is a balance on the account.
What kinds of cards offer deferred interest?
Most retailers offer store-branded, deferred interest credit cards. Around the holidays, retailers tend to roll out offers of deferred interest credit cards right alongside their holiday sales in an attempt to get consumers to go ahead and make a large purchase, or to do most of their shopping with that store.
However, not every retailer that offers a store credit card deals in deferred interest. Plus, it can be challenging to figure out how interest is charged – while there are federal rules that require lenders to plainly state APR, there are no such protections when it comes to transparency about interest. In other words, it is up to YOU, the consumer to read the fine print, or ask a lender directly if you have any questions about what you are responsible for.
What are some ways to avoid deferred interest?
- Know when your deferred interest period ends
If you ever forget, you can always find it on the first page of your billing statement. Use the date to help you figure out how much you will need to pay each month to have your balance paid in full before your interest kicks in.
- Always pay more than the minimum payment due
This is good practice for credit card repayment. But, for credit cards that offer deferred interest, it is especially important because the minimum owed will likely not be enough to pay your balance in full by the end of the period.
- Always pay on time
A missed payment could end your deferred interest rate early, incur penalties, or increase your already high-interest rate. And when you submit your final payment, send it with plenty of time to make sure that it is applied before any interest hits your account.
- Only charge what you can afford to pay off during the zero percent interest period
Ideally, you would figure out how much you would need to pay each month during the promotional period to have it paid off before making your purchase. Knowing your limits in this way comes in handy when making a significant purchase, such as the television in our example. It can be tempting to add on accessories, protection plans, or upgrades to other peripherals. Considering how much more you would need to pay per month by adding on extras can be a deterrent to help you stay within your budget.
While deferred interest credit cards are relatively easy to get, some alternatives are not only much safer but more financially advantageous. If you want to finance a large purchase or your holiday spending, consider finding a traditional credit card with a promotional APR that will waive interest. With just a little planning ahead, you can avoid the dangers of deferred interest.