There's Always a Catch With 'No Interest' Offers
Nationally Syndicated Personal Finance Columnist, The Washington Post
We have become a nation charmed by offers that something might be free. Especially when it comes to credit.
Let’s look at the offers many consumers will receive as they shop for the holidays. Professionals call these promotions “deferred interest plans.” But more commonly the advertising may say something like “No interest for 18 months” or “0 percent interest for 12 months.”
This is credit with a catch. And if you are caught, it’s expensive.
The no-interest deals involve getting a credit card on which your purchases will be charged. During the promotional period, interest is accruing, but you won’t be charged if the balance is paid in full by the deadline. Fail to meet that date and you could have to pay all of the deferred interest.
For borrowers with subprime credit scores — the most vulnerable to such offers — 43 percent are ultimately charged retroactive interest, according to the Consumer Financial Protection Bureau.
CardHub, a credit card comparison website, has issued a report about the trickiest deferred finance offers. The site says that of the major retailers that provide financing, 50 percent offer a deferred interest plan.
If you’re going to use a deferred interest plan, here are some things you should be aware of, the CFPB says:
Know when you owe. The credit card company has to be clear about the date by which you must pay off your balance to avoid being charged deferred interest. The information should be on the front of your bill. It has to be disclosed separately during the deferred interest period and labeled in a way to make it clear it’s your deferred interest charge.
Read the fine print or card terms carefully because if you pay late or leave an unpaid balance of even just $1 at the end of the promotion period, interest will be retroactively applied to your entire original purchase amount, CardHub points out.
Know what you owe. Pay attention to the interest rate because life happens. And if there’s a chance you can’t pay off the balance in time, that’s the rate you’re stuck with.
In CardHub’s report, rates varied, with most carrying rates of 20 percent or more. The highest rate was 29.99 percent. As of Nov. 20, the average annual percentage rate, or APR, for fixed-rate credit cards was 13.02 percent, according to Bankrate.com.
Rates are often significantly higher for deferred interest programs than for other cards. So don’t be so overconfident about your ability to pay that you ignore the interest you will be charged.
Know your payment options. You may wait until you get near the end of the promotion to pay off the balance or make payments along the way. But here’s the thing: You now have another credit card.
Let’s say you charge other items to the card. You make more than the minimum payment in an effort to pay off at least the items purchased as part of the deferred interest promotion. Credit card companies can apply your payments to purchases with the highest APR first, which may not be the items bought under the deferred interest promotion. There is an exception, however. In the last two months of a deferred interest period, if you pay more than the minimum monthly payment, your card issuer has to allocate that money to pay down your deferred interest purchases.
When it comes to deferred interest promotions, you could be taking a big financial risk unless you already have the cash stashed away. Don’t get caught up in the excitement of free money because you could end up paying big time.
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Source: Dallas News