Deferred interest credit cards from retail stores may seem like a good deal, but you can wind up paying more for your debt.
The CFPB announced this month that it sent letters to encourage retail credit card companies to make promotion offers more transparent. They did this in reaction to reports that consumers often feel tricked or trapped by deferred interest once the promotion period ends. The CFPB wants these retail creditors to take steps to ensure consumers know how deferred interest credit cards work before they sign up at checkout.
What is deferred interest?
Deferred interest credit cards offer a special promotion where you pay no interest for a short time (usually 6-12 months). This usually happens with retail store credit cards. However, this is not the same as a 0% APR introductory period on a regular credit card. The difference is that with deferred interest, you pay retroactive interest charges at the end of the promotion period.
Basically, with deferred interest you want to pay everything off before the end of the promotion. Otherwise, you get popped with high finance charges that you didn’t expect. Even if you paid off 99% of the balance, if that 1% is left when the promotion period expires, you pay interest charges on 100% of the original debt owed.
What does deferred interest mean for my debt?
Let’s say you buy furniture for $3,000 with a 0% APR promotional rate that lasts for 12 months. You pay off $2,500 within that year.
- If you use a regular credit card that offers 0% APR introductory, then you pay interest charges on $500. In other words, interest only applies to the balance remaining
- However, if you use a retail store card with a 0% APR promotion and deferred interest, then after one year you’d face interest charges on the full $3,000 balance.
Current retail credit card interest rates are over 21% APR. On the card without deferred interest charges, you’d pay just over $15 in total interest charges if you kept up the same payments you made during the promotion period. However, on the card with deferred interest charges, total interest would be over $2,000. Your total cost would be over $5,000.
This is why the CFPB wants retailers to be more upfront and make it clear when they sign up consumers. These promotions can sound great at checkout; but you need cash flow in your budget to pay off the debt in-full before the promotion ends.
What to do if you run into trouble with deferred interest charges
“There are several ways to consolidate retail credit card debt,” explains Gary Herman, President of Consolidated Credit. “If you face high interest charges, consider options for debt consolidation. People with high credit scores who are financially stable can use DIY solutions, such as balance transfers or consolidation loans. If you have limited cash or bad credit, your best option is usually to enroll in a debt management program.”
This can help you get started to explore each solution:
- Balance transfer credit cards offer 0% APR (not deferred) for an introductory period. You would transfer the balance for a small fee to the new card. This would reset your promotion APR clock so you have more time to pay off the debt interest-free.
- Personal debt consolidation loans don’t offer 0% APR, but they generally have APR of less than 10%. If it will take more time than a promotion period to repay what you owe, consider a consolidation loan.
- Debt management programs offer a path for people to consolidate even when they have high volumes of debt or low credit scores. A credit counseling agency helps you find a payment that works for your budget. Then they negotiate with your creditors to reduce or eliminate interest charges.