In the last-minute rush to put holiday gifts under your tree, you might be enticed by deferred interest store-branded credit card offers. The deals extend “no interest” for a promotional period ranging anywhere from 6 to 36 months, but they can often create more problems than they solve.
These zero interest offers are enticing for anyone making big purchases, and when used wisely, can be a good option for making larger purchases. Consumers who repay the full promotional purchase in the allotted timeframe obtain free financing.
But when the buyer doesn’t pay off the entire balance within the promotional period, all of the interest accruing from the date of purchase is charged to the customer. “Suddenly, you’re on the hook for interest at the full rate from day one,” explains Brian Karimzad, a consumer credit card specialist and co-founder of MagnifyMoney.com.
These promotional deals cause problems for a number of reasons. A common pitfall is paying only minimum required payments which don’t get the borrower across the finish line before the end of the promotional period, causing them to miss the deadline. Instead, the buyer should calculate what those installments must be in order to successfully repay the purchase price on time.
When interest is charged after the end of the promotional period, it applies to the entire purchase price, not just the remaining balance. For example, if you purchase a $1,000 computer with no interest for 12 months, if you have any amount outstanding at the end of 12 months, interest is calculated on the initial $1,000 charge, backdated to the first day.
Those interest rates tend to be much higher than standard credit card rates, often in the neighborhood of 30% APR. When the backdated interest is charged, consumers can find themselves carrying a balance that exceeds the amount of the initial purchase.
“We liken these deals to a ticking time bomb,” says Chi Chi Wu, a consumer credit attorney at the National Consumer Law Center. “You can have proper disclosures, but the terms aren’t explained to the average consumer.”
Wu explains that subsequent purchases made on the same card are often subject to different terms, and payments toward the card’s global balance may apply to the subsequent purchase before the promotional purchase, leaving consumers more likely to fail to repay the balance before the end of the promotional period. “These deals are inherently confusing, and it quickly becomes very complicated,” Wu says.
Karimzad says there are many legitimate and transparent no interest deals, but the key is to get one before you get to the store.
Instead of being swayed by an in-store credit promotion, Karimzad recommends figuring out how you’re going to pay for your purchases in advance. “Find a low interest or no interest card from a bank or credit union before you shop,” he suggests. “Retailers are taking advantage of your impulse at checkout to extract worse terms for you.”
Bottom line is that non-payment of the purchase in the promotional period can be expensive, and in-store credit card deals should be approached with caution.