No-interest or deferred-interest deals you see at retailers sound fantastic when you need to get a new TV or dishwasher or piece of furniture. You get to save money and make small, manageable monthly payments. But with every good deal, there is a catch, and these come with expensive traps if you do not understand how they work.
About one in five people who sign up for no-interest deals on big-ticket items actually wind up owing finance charges, usually hundreds of dollars, because of tripwires in the terms of the credit cards that are used to finance them. “No interest if paid in full” the ads shout in large type. The small type tells a different story.
First, you will notice that the deferred interest actually starts to build up on your store card the day that you buy the item. The interest rates can vary from 20% to 25%, which are different from the normal rate tied to the card you are using.
Avoiding the finance charges is not a sure thing. If you fail to pay off the purchase by the deadline or make one late payment, the card issuer will dump months of back interest on your balance. But what really gets people is they fail to understand that if you buy other items with the card, you’ll have to track those balances separately from what you owe on the no-interest deal.
If have a balance on your card or if you buy items on your card while you have the deferred interest, these do not get combined. If you make the suggested minimum payment each month, part of the payment gets applied to the no-interest loan and part of it gets applied to the carry over balance. This means, if you only make the minimum payment you will not pay off the interest free loan and you will end up paying all of the deferred interest.
Here are some ways to avoid the common mistakes people make with deferred-interest deals on store cards:
• Divide the amount owed for your purchase by the number of months in the interest-free period to see if you can afford the payments.
• One late payment will invalidate the deferred interest deal, so make these payments a priority. If you are sending a check, make sure you mail it 12 days before the due date. If you are paying online, make the payment date three days before the due date.
• Remember that the minimum payment noted on your statement will not be enough to avoid deferred interest charges. The store will never set up the payments to make sure you pay it off in time. You have to do that calculation then pay more than the minimum amount due.
• Double-check the end date of the deferral period, and give yourself plenty of time to meet the deadline. Best practice is to make your first payment right away so you are really a month ahead.
• Keep an eye on statements to make sure that fees, such as for payment protection premiums, are not throwing off your calculations. In fact, you should always refuse those offers of “protection.” These are unnecessary add-ons that rip you off.
• Avoid using the card for other items. This makes it easier to track the deferred interest balance. The only balance you should carry is the one for your big ticket purchase. Before you use the store card for a deferred interest item, pay off any existing balances. Then put the card away in a locked drawer and never use it again until the deferred interest item is paid off.
Finally, remember to pay attention to the details. It is your responsibility as a consumer to read and understand the terms and conditions of any deferred interest deal. When you sign something you are agreeing to these terms and it is up to you to understand them. The store is under no obligation to help you understand the terms.
In reality, everything is there in the fine print. Not reading it because the print is small is not a defense. New rules and regulations by the Consumer Financial Protection Bureau to make the language clearer and easier to read will likely be coming soon, but you are still responsible for understanding all contracts you sign.
The bottom line..these are great deals and can save you lots of money if you are smart and careful. They can cost you hundreds of additional dollars if you fail to pay attention. Feel free me anytime with questions or to share your experiences, 713-341-6184.