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A deferred interest financing offer sounds like it will help you avoid paying interest. Yet in reality, these offers often only delay your interest fees until later — and they could punish you for a misstep along the way. Learn why deferred interest financing may not be nearly as attractive as it seems.
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It’s easy to avoid paying interest on credit card purchases. Simply pay your statement balance in full each month and, with most card issuers, that does the trick.
Yet sometimes credit card issuers have special promotional offers, known as deferred interest financing. These offers give you a chance to avoid interest in another way. With deferred interest, you can make a purchase now and pay it off later. In the meantime, you won’t pay any interest on qualifying purchases during the special financing period.
Sound too good to be true? It might be. There’s a catch and a potentially expensive one at that.
If you don’t understand the terms of a deferred interest offer, you could still wind up paying all of those interest fees before, during, or after the promotional period expires.
Deferred interest is interest that you’ve accrued on an account, but haven’t yet paid. Instead, the interest is delayed (aka deferred) for a period of time (so it’s a bit different than a 0% APR offer).
If you pay off your balance before the interest-free period expires, you could genuinely enjoy short-term free financing. But if you don’t pay off the total balance by the offer’s deadline, or if you miss a payment, the interest that’s been accruing in the background may be added to your account in one lump sum.
Deferred interest offers come in a variety of forms. They are commonly marketed by retailers and other companies for the purchase of big-ticket items like appliances, electronics, furniture, or even medical procedures.
Below is a hypothetical example of how a deferred interest offer on a credit card might work.
A deferred interest offer isn’t the same as 0% APR on a credit card. Either option could potentially help you save money on interest fees, but one — 0% APR — is hands down a better deal.
The following chart provides a side-by-side comparison between a 0% APR offer and a deferred interest promotion. In this example, the 0% APR and deferred interest plans only last for one year, but the hypothetical borrower ends up taking two years to pay off the full balance. This illustrates how much extra you’ll pay with deferred interest financing.*
|0% APR||Deferred Interest|
|Promotional Offer||0% for 12 months||No interest if paid in full in 12 months|
|Amount Paid During the Promotional Period ($250/month)||$3,000||$3,000|
|Remaining Balance (Principal) When Promo Expires||$1,000||$1,000|
|Interest Rate During Promo Period||0%||25%|
|Interest Accrued During Promo Period||$0||$656|
|Interest Rate After Promo Period||25%||25%|
|Amount Owed When Promo Period Ends||$1,000||$1,656|
|Amount Paid in 12 Months After Promotional Period (at 25% interest)||$1,126||$1,865|
|Total Interest Paid||$126||$865|
|Total Amount Paid||$4,126||$4,865|
*Note: This example is hypothetical. The amount of interest you pay will vary based on the terms of your account.
As you can see, paying $250 per month for 12 months isn’t enough to finish off the full $4,000 balance. And after those 12 months, the results are very different with a 0% APR plan vs. deferred interest financing.
With the 0% APR plan, after those 12 months only the remaining balance ($1,000) will be subject to the 25% interest rate. If you pay off that balance over 12 months, you’ll pay about $126 in interest.
But with the deferred interest plan, the balance had to be fully paid off in time — otherwise the interest wouldn’t be deferred. So, since there was $1,000 left to pay, that interest gets added back on. In this case, the interest amounted to $656, leaving you with $1,656 left to pay at an interest rate of 25%. If you take 12 months to pay that off, you’ll pay about $209 in interest.
So, when it’s all said and done, you’d pay $4,126 with the 0% APR plan, or $4,865 with the deferred interest plan.
You can easily see the monetary consequences of each offer, compared to how much you’d spend if you pay off the balance in that first year:
Deferred interest and zero-interest offers may sound similar on the surface. Yet, as you can see, these two types of offers can have very different impacts on your bank account (and potentially your credit scores).
Regarding credit cards, a deferred interest offer shouldn’t impact your credit any more than carrying an ordinary balance would. While you’re carrying the balance, your scores may drop a bit, given the importance of your debt-to-limit ratio in most credit scoring formulas. You can also damage your scores by missing your monthly payments, which you’ll still be required to pay for the duration of the deferral period. Otherwise, pay off your full balance before the deferral period ends, and you should be fine.
However, if you fail to pay off your balance by the time the promotional period ends, then you’ll be charged interest on the full balance from day one. If those interest charges are large enough, then they could adversely impact your credit the same way the balance did in the first place — simply because they’ve increased your balance.
Deferred interest is rare among credit cards from major issuers. Instead, deferred interest offers are more common with retail store credit cards and co-branded credit cards.
If you want to find out whether your credit card charges deferred interest on certain purchases, one of the following approaches may help.
Certain terms may indicate that a card offer is subject to deferred interest. For example, there may be cause for concern if you come across terms such as:
The CFPB recommends looking for the word “if” when you’re considering a promotional financing offer. The “if” is a red flag that there’s a catch involved. In other words, you might pay more than you expected in the end.
Most credit card companies don’t extend deferred interest financing promotions. But there are a few card issuers who do. Here’s a list of some of the worst offenders.
If you already signed up for a deferred interest offer, the following strategies might help you avoid common pitfalls.
It’s best to avoid deferred interest offers altogether. Unless you’re 100% certain you can pay off your full balance before the no-interest period ends, these promotional offers could come back to bite you.
The smartest way you can manage your credit cards is to never charge anything on an account that you can’t afford to pay off right away. If you need affordable, short-term financing for an emergency expense, either a 0% APR credit card or a low-interest personal loan should be a safer bet.
Michelle Black is a leading credit expert, author, writer, and speaker with over a decade and a half of experience in the credit industry. She is an expert in credit reporting, credit scoring, financing (mortgages, credit cards, loans), debt eradication, budgeting, saving, and identity theft. She is featured monthly at credit seminars, podcasts, and in print. You can connect with Michelle on Twitter (@MichelleLBlack) and Instagram (@CreditWriter).
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