Should you take advantage of "deferred-interest" financing?
With the expensive holiday shopping season fast approaching and credit card debt again reaching historical levels, financing offers figure to be especially tempting in the weeks to come. And that makes “deferred interest,” a feature commonly found in the fine print of retailer payment plans, particularly dangerous. Deferred-interest financing is like a wolf in a sheep’s clothing, pairing an enticing offer – something like “no interest if paid in full” or “special financing” – with a clause that allows the deal to turn ugly if you make the slightest mistake.
Deferred interest means you pay no interest or a reduced rate for a period of time, but allows for the possibility that a high regular APR could retroactively apply to your entire original purchase amount – as if the low intro rate never existed. Paying one month’s bill a day late or owing even $1 when the promotional period ends could trigger the deferred interest clause, activating 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.
Suppose, for example, you’re interested in opening a new credit card account to finance a couple of big-ticket items from your child’s Christmas list. And let’s say they cost a total of $800, an amount you think you can repay within six months in the absence of interest. But things happen, and it ends up taking you seven months instead. With a normal 0% credit card, you’d end up paying about $2 in interest (assuming a 20% regular APR) because interest would apply only to the balance remaining at the intro term’s conclusion. But with a deferred-interest credit card, you’d be on the hook for roughly 27.5 times that amount (i.e., $55 in interest).
In order to help consumers avoid such an unfortunate financial surprise, WalletHub evaluated the financing options available from 72 large retailers. Specifically, we determined which retailers use deferred interest and evaluated how transparent their websites are about the terms of such plans. After all, retailers that offer deferred-interest financing are typically less-than-up-front about just how much these plans can really end up costing you.
Does it surprise you that 0% financing is twice as big of a draw for a store credit card as a first-purchase discount?
88% of all deferred-interest credit cards are issued by just three banks: Synchrony, Citi and Comenity.
For added insight into the use and potential regulation of deferred interest financing plans, WalletHub turned to experts in the fields of law, business and consumer protection. You can check out the WalletHub panel of experts, the questions that we asked them and their comments HERE.