Credit cards

How Deferred Interest Credit Cards Can Cost You

Shoppers shop at a Best Buy store on Black Friday in San Carlos, California, U.S., Friday, Nov. 26, 2021.

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Before you grab that great deal through a store’s special financing offer, make sure you know what you’re signing up for.

About half of retailers offer deferred interest credit cards, but 56% of Americans don’t know how the funding strategy actually works, according to research from personal finance website WalletHub. He surveyed more than 300 American adults in October.

This lack of knowledge could mean a big bill for you down the line. Although you pay no interest or a reduced rate for a while, you can get a high regular APR applied retroactively to your original purchase amount if you pay a month’s bill late or even owe as little as $1 at the end of the promotional period.

For example, if you charged $800 on a normal credit card with a 0% APR promotion for six months, and it takes you seven months to pay it off, you will owe $2 in interest, assuming an APR regular 20%, according to a WalletHub analysis. With a deferred interest card, you’ll end up paying about 27.5 times that amount — or $55 in interest — in the same scenario, according to the website.

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“This not only negates any savings from the promotion, but you end up paying a lot more for that item than you probably expected,” said Jill Gonzalez, senior analyst for WalletHub.

Of those who understand deferred interest, 77% think it’s unfair and 69% think it should be illegal, according to the WalletHub survey. (See WalletHub’s list of retailers that use deferred interest credit cards here.)

Americans have an average of 2.33 retail credit cards and an average balance on those cards of $1,887, according to Experian’s 2021 State of Credit Report. Interest rates are generally higher than other credit cards. They have an average APR of 27.93%, WalletHub said.

At this time of year, it can be particularly tempting to sign up for a deferred interest card in order to take advantage of great deals on your holiday gifts. Still, busy stores mean long lines and potential pressure to register without reading the fine print, Gonzalez said.

If you’re offered the choice of special financing or an upfront discount on your first purchase, go for the discount since there are no strings attached, she advised.

If you accept the deferred interest offer, be sure to listen carefully, know the terms of the APR, and repay the purchase before the end of the introductory period.

Sure, there are retail credit cards that offer no-interest offers, including a 0% introductory APR on purchases that last an average of 16 months. About 29% offer ongoing rewards, mostly in the form of points, according to an analysis by WalletHub.

Think about the retailers you frequent throughout the year and not just for your holiday shopping, Gonzalez said. For example, stores like Target and Kohl’s offer cards with perks like discounts or rewards, she said.

Just make sure you don’t accumulate debt.

“People are definitely spending,” Gonzalez said. “There’s a lot of pent-up demand and there’s also inflation driving up the costs of certain goods.

“There’s this chance that you’re going into over-indebtedness and spending money you don’t have.”

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