As a victim of a deferred-interest credit card, I warn that these products can really upend your finances if you don’t pay attention. While they can help you out of a bind, not reading the fine print could be your undoing.
What Is Deferred Interest?
Deferred interest is when your interest payments are essentially placed on hold for a specific amount of time. You don’t pay any interest if you pay off the amount borrowed before the time period ends.
However, if you don’t pay off the balance in full by the time your deferred interest window closes, your card issuer charges you for all of the interest that would have accumulated since the start of your term — whether the remaining balance is $5 or $5,000.
Deferred Interest vs. 0% APR
Deferred interest and 0% introductory annual percentage rate offers are similar at first glance, but the main difference is how the card issuer handles interest after the promotional period. Let’s do some math to lay out the differences.
Say you charge $5,000 on a credit card that has a 0% introductory APR for 15 months on purchases. And if by the end of those 15 months you still have a $500 balance, credit card interest will begin accruing on just $500.
But with deferred interest, you’d have to pay interest on the remaining balance plus all the interest accrued on the original $5,000 balance.
[Read: Best 0% APR Credit Cards.]
How Does Deferred Interest Work?
Deferred interest can sneak up on you if you’re not paying attention. Especially if you’ve mistaken the promotional deferred interest period for a 0% introductory APR period (guilty).
When I was younger, I applied for a CareCredit card to pay for my dog’s veterinary bills. I applied for the card right there at checkout, not completely sure what I was even applying for. I didn’t know the CareCredit card was a deferred-interest product and (through no real fault of her own) the receptionist at the vet didn’t explain it to me.
I think I was a month away from my promotional period ending when I realized I made the mistake of thinking CareCredit had a 0% introductory APR period. I had to pull several hundred dollars from my savings to avoid paying thousands in interest. You bet I started reading the fine print after that.
Let’s say you had 12 months to pay off a balance of $5,000. But for one reason or another, you still have a balance at the end of the promotional period of, say, $150. Keeping CareCredit as an example, the current APR on new CareCredit accounts is 32.99%. That means you would have to pay almost $1,000 in retroactive interest, even though your remaining balance is only $150.
How to Tell if a Promotion Is Deferred Interest
Retailers often offer deferred interest through store credit cards or in-house financing options. Here are some tips to help you figure out if you’re being offered a deferred-interest product:
— Pay attention to phrases like “no interest if paid in full.” Make sure to figure out what this means exactly. What are the conditions of paying your balance in full? What happens if you can’t pay in full by the end of the promotional period?
— Read the fine print of store cards. Stores like The Home Depot, Wayfair and Best Buy offer deferred-interest products and promotions. So if a cashier offers you a product at checkout, make sure you know what you’re applying for.
— Be wary of medical credit cards. The same goes for medical credit cards. You might be offered these promotions at your doctor, dentist or vet (like me). It’s important to remember the employees behind the counter are probably not as well informed as they should be on products like these and may unintentionally give you incorrect information.
Pros and Cons of Deferred Interest
PROS
— Save money. You won’t owe interest as long as you pay off your purchase by the end of the promotional period.
— Budget for a large purchase. The promotional period allows you to calculate how much you need to pay monthly to clear your balance before the deferred-interest period ends.
— Easier to obtain. Deferred-interest products can be easier to obtain than other credit cards, especially if your credit score isn’t the highest.
CONS
— Can be costly. The regular interest rates on these products are higher than the average interest rate on new credit cards and can be a slap in the face after not having to worry about interest for over a year.
— Extremely risky. Sometimes, even a single late payment can be enough to revoke your offer, and you’ll owe interest charges. Plus, you have to count on continued financial health to ensure you make all the necessary payments.
— Tricky to understand terms. The terms of deferred interest financing can be complex and lead to misunderstandings — and more debt than consumers had anticipated.
Deferred Interest Alternatives
I wouldn’t recommend a deferred-interest product even on the best of days. Life is too unpredictable, and you could be stuck with a bill you have no way of paying. Here are some alternatives to consider instead:
— Zero percent APR credit cards. If you know you’re going to make a large purchase or have a large bill on the horizon, apply for a 0% intro APR credit card in advance. The promotional periods are usually longer, and you won’t have to deal with retroactive interest if you can’t pay the balance in full by the end of the promotion.
— Buy now, pay later plans. Popular BNPL options include Affirm, Afterpay and Klarna. Payment plans vary tremendously, though, so make sure you pick a plan that works for you.
— Personal loans. The interest rates on personal loans tend to be lower than deferred-interest cards. Just keep an eye out for extra fees along with interest rates and term lengths.
Deferred-interest credit cards can be a viable option as a last resort, but I recommend trying other alternatives first.
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What Is Deferred Interest, and How Does It Work? originally appeared on usnews.com
