Credit Basics
Beware of zero percent time bombs
By Jackie Crosby, Scripps Howard
When does a retailer's seductive moment become a consumer's financial trap?
Credit counselors say the "no-interest, no-payment" offers that entice holiday shoppers each year could serve as Exhibit A.
"These things are potentially very troublesome," said Howard Dvorkin, founder of Consolidated Credit Counseling and author of "Credit Hell: How to Dig Out of Debt."
Unfortunately, most of us don't read the fine print or fully grasp the details of the contract. We just know we can take home that $999 plasma TV and have 12 months to figure out how to pay for it.
We hardly consider the high interest charges we'll get socked with if we don't pony up on time.
"Retailers understand the nature of the American consumer," Dvorkin said. "Though people may have great intentions of paying off the balance in full when the promotional period is over. A large majority don't. It's just as simple as that."
No-interest deals typically are offered on big-ticket items such as cars, furniture, jewelry, appliances and electronics. Sometimes the price has been inflated on the no-interest offer, so it pays to comparison shop.
Zero percent financing promotions can be a boon for disciplined consumers who pay
off the balance before the clock strikes on the deadline. These shoppers take advantage
of someone else's interest-free money for a year, and let their own money grow in
the meantime. But most consumers don't fit that profile. Dvorkin said 65 percent
of people with credit cards carry monthly balances.
For those who don't pay on time, that no-interest claim turns into a high-interest
ticking time bomb. Interest rates often range from 24 percent to 28 percent, nearly
10 times the inflation rate and double to triple the cost of a conventional loan.
And even if you've been diligently paying off your balance each month, you'll get
charged interest on the entire purchase amount, not just on what you owe.
Let's say you owe just $150 on a $2,000 sofa you financed with a zero percent offer.
Missing the final payment will cost you an extra $480 at 24 percent interest.
On top of that, you'll probably get socked with a late fee of $35 or so.
"The fine print demands, 'Read me! Read me! Read me!' " said Paul Richard, a financial
consultant and executive director of the nonprofit Institute of Consumer Financial
Education. "They're all come-ons to get someone into the store to make a purchase.
They're designed to generate traffic, and they do."
Richard warns that consumers can get doubly whacked when a universal default clause
is part of a no-interest credit-card contract. This means that if you don't make
a timely payment to someone else - say on your mortgage, car or Visa bill - your
interest rate on the no-interest deal can get jacked up.
If your credit score already is shaky or you've got a low credit limit, taking the
offer could hurt your chances of getting future loans or improving your credit ranking.
