The holiday spending season starts officially on Black Friday with some tempting sales and even more tempting no-interest financing offers from retailers.
The no-interest feature, unfortunately, is just a come-on. When the interest charges arrive, watch out. Card Hub, in its 2012 Deferred Interest Study, checked the interest policies of 45 of the nation’s largest retailers.
Here is what it found:
• If you don’t pay off your entire balance by the end of the deferred interest period, interest Is retroactively applied to the entire original balance, rather than simply whatever balance remains at that time.
• With deferred interest, paying off your debt one month behind schedule could make your financing 27 times more expensive
• 82.2 percent of major retailers offer a financing option.
• Of the retailers that offer some form of financing, 62.2 percent offer a deferred interest payment plan.
• Of the retailers that offer some form of financing, 54.1 percent are not transparent about their policies.
• 37.8% of the retailers that provide financing options offer a deferred interest plan and are not transparent about their policies.
• Only 21.6% of the major retailers that offer financing are transparent about their policies and do not have a deferred interest payment plan.
• Companies such as Apple and Amazon, which have built their brands around providing consumer-friendly products, offer deferred interest – a decidedly misleading and potentially harmful financing option.
• More than half of the retailers contacted regarding this study were unresponsive or did not have relevant information, which indicates that they do not view deferred interest as a major customer service issue, but rather purely as a means of driving sales.
• Either deferred interest payment plans should be abolished or regulators should institute more stringent disclosure requirements.
If you’re still not convinced about the dangers of deferred interest, here’s an example that could really drive the point home:
Say you make a $750 purchase with a 0% credit card. You probably think that the card’s 20% regular interest rate won’t ever come into play because you should have no problem paying down your balance within six months. Unfortunately, you incur an unexpected expense, and you wind up with a $50 balance at the end of the six-month intro period. No biggie, right? Well, it wouldn’t be if you had a normal 0% introductory term, as interest on a $50 balance for one month would only cost you around $1. However, if your 0% rate is part of a deferred interest payment plan, it will be like the introductory rate never existed and you had instead been using a card with a 20% rate from the beginning. You’ll therefore end up paying around $43 in interest instead (i.e. 4,300% more). That’s just not fair, and therein lies the problem with deferred interest.