As the holiday season gets into full swing, so too do the credit card promotions from retail stores far and wide.
This is prime season for enticing shoppers to sign onto the dotted line for cards that offer a discount on your first purchase or a special 0% introductory APR — which to many cash-strapped consumers can sound like an ideal way to finance a holiday extravaganza.
The reality of these deferred-interest retail credit cards however, is that they may not be as helpful as they sound at first blush. In fact, in many cases, signing on for one can cost far more than expected if you’re not clear on how the deferred interest proposition works.
A recent study from WalletHub revealed as much. It found that 82% of people do not understand deferred interest. Perhaps even more telling, 62% of people surveyed think deferred interest should be illegal.
Why such strong sentiment about outlawing the practice? Maybe it’s because those who are clear about its pitfalls realize what a trap deferred interest can be.
Why Deferred Interest Cards Can Be a Dangerous Trap
As the WalletHub study explains, deferred interest offers typically mean that you pay no interest or a reduced rate for a period of time — but the setup allows for the possibility that a high, regular APR can retroactively be applied to your entire original purchase amount, compounded for months, as if the low introductory rate never existed.
Let’s state that again, just to be clear: Despite the 0% APR introductory offer, a much higher interest rate can be applied to your entire original purchase amount.
How can that happen? Paying one monthly bill late or owing even $1 when the promotional period expires can trigger that nasty deferred interest clause, which in turn activates high interest charges.
“Deferred interest is common with 0% store financing offers. And since many retailers don’t disclose deferred interest clearly enough, it can lead to some expensive post-holiday shopping season surprises,” writes Alina Comoreanu, senior researcher at WalletHub.
With that in mind, here are some tips and best practices when it comes to fielding the deferred interest offers that will likely be coming your way this holiday season.
The Best and Worst Deferred Interest Offers
The WalletHub study found that many retailers don’t offer deferred interest cards at all, including Target, Costco, Barnes & Noble, Kohl’s, and Ann Taylor, plus many others. But among the retailers that do tempt customers with deferred interest offers, some are more transparent than others. So if you must sign up for one of these cards, keep the following information in mind.
Pottery Barn and West Elm were the least transparent retailers when it comes to making clear to consumers how their deferred interest programs work. This is the third consecutive year these three retailers have topped the “naughty” list, while Zales joined their ranks this year.
Each of these retailers scored a zero in every single transparency category reviewed by WalletHub. The categories surveyed covered such things as how prominently a retailer posted information on its website about how interest is assessed from purchase date, the readability of that information, and the readability and location on the website of the credit card’s regular APR.
Retailers that did the best in each of these categories included Apple, Home Depot, Lowe’s, JCPenney, and Staples, among others.
Tips for Using a Deferred Interest Credit Card
If you’ve decided to take the risk and sign up for a deferred interest credit card, do yourself a favor and make note of a few best practices that can help see you through the experience more successfully.
Howard Dvorkin, a CPA and chairman of Debt.com, recommends creating an alert on your phone to remind you of when the introductory period ends.
“Here’s something I can almost guarantee: Anyone who has a store credit card also has a smartphone. And that smartphone has a calendar. And that calendar has alerts,” said Dvorkin. “So, set an alert for the end of the introductory offer and make sure to pay the thing off.”
Failing to pay off the entire balance before the intro period ends wipes out any savings you may have realized by signing up for the card in the first place, notes Dvorkin. “You’ll pay double or even triple those savings in your first month after the introductory offer expires,” he added.
Since even one late payment can trigger the higher APR, it’s smart to set monthly due-date reminders or automate your payments as well. And you should plan to pay more than the minimum payment required each month — enough to eliminate the balance entirely before the intro rate expires.
Finally, it’s important to understand your own behavior and habits, advises David Gafford of Shift Processing, a credit card processing company.
“I think the best people can do is really understand what type of person they are. If they don’t want to read the details or the fine print, then this type of credit card may not be for them,” he explained. “Because if they don’t understand what they’re getting into, they’ll be up a creek fast. These cards are very unforgiving.”
Better Ways to Finance Your Holiday Spending
Here’s a scenario that illustrates why you might want to consider safer options for financing your holiday spending.
Suppose you open a new credit card to finance a couple of big-ticket items from your Christmas list. And those items end up costing $1,000, an amount you plan to repay during the card’s 12-month, zero-interest introductory period.
But life happens to all of us, and unexpected expenses occur — especially around the hectic holidays. So, let’s say it takes you 13 months to pay back that $1,000, making payments of $77 a month.
If you had a normal 0% credit card (such as a good balance transfer card), you’d only pay about $1 and change in interest for that extra month’s balance, assuming an average 17% APR — because the higher interest rate would only apply to the balance remaining at the end of the 12-month introductory period. No biggie.
On a deferred interest credit card, however, you’d end up paying roughly 100 times more in interest — over $100 — because once Month 13 hits, the ordinary 17% APR would be applied retroactively to each month’s balance over the last year. As the Consumer Financial Protection Bureau notes, “If you don’t pay the entire balance off in 12 months, or if you are more than 60 days late in making a minimum payment, you will be charged interest for each month on the balance you owed in each of the 12 months.” Here’s what that would look like:
|Balance||Retroactive Interest Owed|
Is it any wonder so many people think these cards ought to be illegal?
“Fortunately, there are better financing alternatives, in the form of regular 0% APR credit cards,” said WalletHub analyst Jill Gonzalez. “This means that you pay no interest on purchases for a certain number of months after opening the account. After the interest-free period ends, the card’s regular APR applies only to the remaining balance.”
Better yet, pay cash for your purchases, says Dvorkin, who advises sticking to a strict budget for the holidays.
“People must focus on what’s important. If they really can’t afford presents, then consider offering personal services as gifts such as dog walking, cleaning the house, or washing someone’s car,” he said.
“At end of the day people need to be very, very careful,” Dvorkin added. “When you go into these stores during the holidays, keep your head about you. Everything looks good. There’s tinsel everywhere. They’re playing the holiday music, they’re getting you into the holiday spirit and you kind of lose your senses, and when you go to check out, you’re pitched this credit card.”
Don’t get sucked in, Dvorkin said. “The best thing to do is make a list of who you want to buy presents for, what you want to buy, and what you want to spend, and that’s it. Nothing more.”
Mia Taylor is an award-winning journalist with more than two decades of experience. She has worked for some of the nation’s best-known news organizations, including the Atlanta Journal-Constitution and the San Diego Union-Tribune.
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