Don’t Get Sucked Into Retailers’ Deferred Interest Trap

You’re probably familiar with “same as cash” credit offers from retail stores, where you aren’t charged any interest so long as the entire purchase is paid off within a given period of time (usually 6 or 12 months). But what many of those stores don’t put in the bold type is what happens if you don’t pay by the deadline.

As opposed to 0% APR introductory offers, many of these offers are what’s referred to as “deferred interest” offers, meaning that if you don’t pay off the full balance by the agreed-upon date — or in some cases if you simply miss a payment — you’re hit with the full interest rate, applied retroactively to the entire original purchase price.

So if you pay for a $1,000 purchase in the six months, you’re golden. But if something happens and you can’t pay the full $1,000 by the sixth month, you’ll be hit with around $50 in interest rates, even if you only have a few dollars of that original $1,000 left to pay.

Compare that to a credit card with a six-month 0% APR introductory offer. If you need an extra month to pay off that $1,000 purchase, you only pay interest on the current balance of the card. So if you’ve been making equal payments and maybe missed a month because you changed jobs or got hit with an unexpected expense, the interest would likely be around $2-$5, which is just a fraction of what you’d owe under a deferred interest plan.

Additionally, deferred interest cards will retroactively apply interest on any purchases you make during the introductory period if you carry a balance after that point. So even if you pay off that original purchase, anything you buy subsequently must also be paid off by the time the deferred interest period ends or you’ll be hit with interest on the purchase prices of those items too.

“When consumers see a no-interest offer, they tend to take that at face value, thinking they’re gaining a true respite from finance charges for the advertised length of time,” says Odysseas Papadimitriou of CardHub.com. “We all know that too few people truly read the fine print of financial agreements, which means most folks don’t find out that they signed up for deferred interest until their costs are suddenly inflated.”

A new CardHub survey of deferred interest plans found that a majority are not transparent — i.e., unwilling to answer questions, or provide incorrect information to consumers — about their plans. More than 50% of the companies involved in the CardHub survey passed questions on to the credit card companies that are actually servicing the differed interest plans.

To us, that indicates that these retailers are willing to use these plans to lure customers into the offer, but are playing a game of “not me” when it comes to customers’ concerns about the plans.

This isn’t to say that 0% APR intro rates are the holy grail for shoppers. In the above example, yes, they save the customer — even the one who goofs and miscalculates their ability to repay in time — a chunk of interest in the short term. But once that intro APR is gone, these cards have no more advantage than any other credit line, and in fact they occasionally have higher than average APRs for when customers exit the introductory period.

So when you’re signing up for either of these sorts of programs, be sure to find out (A) if it’s a deferred interest plan or a 0% intro APR; (B) the exact time limit and what happens to the APR after that intro period ends.

Regardless of which route you go, if you have any doubt about your ability to pay for a purchase within the given time frame, you might want to consider whether it’s worth the risk.