Are Deferred Interest Credit Cards a Scam?
If you’ve ever gone furniture shopping, you’ve likely encountered them: branded credit cards that usually offer a discount on your purchase, as well as no interest for x number of months. It sounds incredibly tempting, and usually results in you doing some enticing math in your head (“This doesn’t really cost me $1,200 – it’s only $150 a month for 8 months!”). But are these types of credit cards really just consumer traps?
To really appreciate the answer to this question, you need to first understand the difference between waived interest and deferred. After all, waived interest offers are excellent opportunities for consumers, and can actually help them get out of debt or pay off large purchases over a period of time. Unfortunately, as many as 72% of consumers don’t already know the answer.
When you get a new credit card offer in the mail, it will often include so-many-months of 0% interest, either on new purchased or balance transfers. These offers allow cardholders to both spend on their card without incurring interest charges, or transfer over existing balances in order to pay them off sooner (or for less).
These are waived interest offers. If you pay off the balance before the promotional period ends, you won’t have paid a penny in interest. If you still have a balance when the promo ends, any remaining debt will be subject to the card’s normal APR. You can continue paying it down as you would any normal credit card balance.
Deferred interest cards, on the other hand, are a different animal altogether.
Typically seen with store- or company-specific credit cards, the concept of deferred interest often sounds much more appealing than it truly is. And if you’re not careful, it could end you up in a lot of hot water.
The concept of deferred interest is this: you open a new credit card with a particular store and, in return, you are offered so many months of 0% interest. Sometimes, you’re also offered a discount on your purchase that day, which can seem like an all-around awesome deal.
The problem comes into play when that promotional period ends… and you discover that the issuer has been keeping track of your would-have-been interest charges the entire time.
You may or may not notice on your monthly statement that the interest on your store credit card is still accruing. In fact, it’s often tucked away on the back or on a second page, not drawing much attention to the constantly-growing number. But believe me, the issuer is paying attention.
As you pay down your promotional balance, the credit card company calculates what your interest charges would have been, had you not taken advantage of a special offer. Since store credit cards often carry some of the highest interest rates around – regularly topping 30% or more – this number will grow quickly.
If the end of your promotional 0% interest period comes and you’ve paid off your entire balance, congratulations. You will escape unscathed, truly taking advantage of a no-interest offer and (hopefully) a discount on your purchase to boot.
However, if the end of that promotional period comes and you’re still paying down the balance – even if it’s only a few dollars short – you’re in for a nasty surprise. That deferred interest that has been ticking all along? It’s going to be added to your balance with the next billing cycle.
You see, deferred interest offers are tricky: you’re given a promotional (often 0%) interest offer for a certain number of months, but the caveat is that you must pay off that purchase before the end of the promotional period, or you lose the offer. If you haven’t done your part to clear the balance, the credit card issuer will consider your bargain null and void. You’ll now be on the hook for all of the interest accrued from day one, as well as any interest charges moving forward.
How to Avoid It
If you are considering a store-branded credit card in order to take advantage of a promotional interest offer, check the fine print. Is it really a deferred interest offer and, if so, how confident are you that you’ll be able to pay it off in full before the period expires? If you aren’t 100% sure, it’s not worth the risk.
If you do move forward with the offer, calculate the monthly payment required to pay off the balance before the end of the offer’s last billing cycle. Remember, even being a few dollars short will mean that you’ll be on the hook for all of that deferred interest. The math here is important.
If you’re not entirely sure that you can pay the balance off in time, don’t risk it with a deferred interest card. You’d be much better off finding a promotional 0% APR offer from a credit card issuer. That way, you can still set your goal to pay off the total purchase before the end of the promotional period. However, if unexpected expenses arise, you’re a few dollars short, or you simply do the math wrong, you’re safe. You’ll only be on the hook for interest charges on the balance moving forward.
It’s easy to see why many believe deferred interest credit cards are a trap. After all, it’s not exactly advertised that you can still wind up paying all of that interest in the end. It only takes learning this lesson once, though, to steer clear of deferred interest offers.
While they may not be a scam, per se, they are certainly an easy way to get yourself – and our finances – in hot water.