We have become a nation charmed by offers that something might be free. Especially when it comes to credit.
Let’s look at the offers many consumers will receive as they shop for the holidays. Professionals call these promotions “deferred interest plans.” But more commonly the advertising may say something like “No interest for 18 months” or “zero percent interest for 12 months.”
This is credit with a catch. And if you are caught, it’s expensive.
The no-interest deals involve getting a credit card on which your purchases will be charged. During the promotional period, interest is accruing but you won’t be charged if the balance is paid in full by the deadline. Don’t meet that benchmark and you could have to pay all of the deferred interest.
For borrowers with subprime credit scores — the most vulnerable to such offers — 43 percent are ultimately charged retroactive interest, according to the Consumer Financial Protection Bureau.
CardHub, a credit card comparison website, has issued a report about the trickiest deferred finance offers.
If you’re going to use a deferred interest plan, here are some things you should be aware of, according to the CFPB:
• Know when you owe. The credit card company has to be clear about the date by which you must pay off your balance to avoid being charged deferred interest. The information should appear on the front page of your bill. It has to be disclosed separately during the deferred interest period and labeled in a way to make it clear it’s your deferred interest charge.
Read the fine print or card terms carefully because if you pay late or leave an unpaid balance of even just $1 at the end of the promotion period, interest will be retroactively applied to your entire original purchase amount, CardHub points out.
In its report, CardHub said 29 percent of the retailers that offer a deferred interest plan scored very low on the transparency scale because they bury information in the fine print or in footnotes. CardHub found that 53 percent of retailers with deferred interest promotions also offer consumers discounts that may be better than signing up for financing. The average discount is 16 percent.
But if you’re going to use a deferred interest plan, here are some other things you should also be aware of, according to the CFPB:
• Know what you owe. Pay attention to the interest rate because life happens. And if there’s a chance you can’t pay off the balance in time, that’s the rate you’re stuck with.
In CardHub’s report, rates varied, with most carrying rates of 20 percent or more. The highest rate was 29.99 percent. As of Nov. 20, the average annual percentage rate, or APR, for fixed-rate credit cards was 13.02 percent, according to Bankrate.com.
Rates are often significantly higher for deferred interest programs than for other cards. So don’t be so overconfident about your ability to pay that you ignore the interest you will be charged.
• Know your payment options. You may wait until you get near the end of the promotion to pay off the balance or you may make payments along the way. But here’s the thing: You now have another credit card.
You need to be clear on how you want your payments allocated. The CFPB says credit card companies are not required to honor your request, but ask nonetheless. Request that the card issuer apply payments to the deferred interest balance first. Better yet, don’t put anything else on the card during the deferred period.
When it comes to deferred interest promotions, you could be taking a big financial risk unless you already have the cash stashed away. Don’t get caught up in the excitement of free money because you could end up paying big time.
Michelle Singletary welcomes comments and column ideas. Reach her in care of The Washington Post, 1150 15th St. N.W., Washington, D.C. 20071; or singletarym@washpost.com.
