Interest postponed isn't necessarily interest denied
The CFPB's issue with deferred-interest credit cards is that the terms can be misleading. With a typical 0% interest credit card, it's usually tied to a promotional offer where the interest is waived for a period of time.
But with a deferred-interest offer, if you pay the entire loan within a set period of time, the interest is forgiven. Under federal law, that deferment period has to be at least six months.
So what happens if you miss a payment or don't pay off the balance in time?
"This isn't a zero percent loan until the end of the promotional period," says Lauren Bowne, staff attorney for Consumers Union. "The interest is actually accruing, and the bank is just waiving the interest payments."
You might think you're getting an interest-free period, but if you miss a payment or pay late, you get penalized by having the accumulated interest added retroactively in a lump sum to your balance. And, going forward, you'll pay interest at the preset rate.
That can quickly swell your debt, as the interest rate on deferred-interest credit cards is generally around 25%, according to the CPFB. That's about 8 percentage points higher than the average variable rate on traditional credit cards of 16.49 percent.
What's more, fewer consumers are paying these loans off during the promotional period, the CFPB found. For 6- and 12-month offers accepted in 2013, cardholders paid off about 75% on time, down from nearly 80% for similar offers originated in 2010.
Consumers with poor credit scores fared worse: Less than half paid their balance off before the end of the promotional period.
If you're not sure you can pay off a deferred-interest balance on time, calculate how much it would cost you to finance your purchase using a credit card you already own to learn if that would be a better option.
It could hurt your credit
Many times, that available line of credit on your new card is equal to the total you're purchasing, Bowne says.
So, in essence, "you're opening up a maxed-out credit card, which doesn't look good on your credit report," she says.
It can also damage your credit score.
Here's why: One of the key factors that helps determine your credit score is your credit utilization ration, which is the difference between how much credit has been extended to you versus how much credit you're using. In general, the more of your available credit you use, the lower your score will be.
To find out how a 0% financing offer would affect your credit, ask the issuer if it will report the account to credit bureaus as a close-ended loan for a set period or a revolving account. Maxing out a revolving loan will have a bigger impact.
When you get the answer, consider your own situation. If you're planning a major purchase in the next year, such as a home or car, it might be cheaper to skip opening a new account, pay cash and preserve your credit score.
It's smart to consider your options
You may plan to pay off that deferred-interest loan before the promotional period expires, but sometimes life gets in the way.
"What we've seen over the past few years is that people have every intention and ability to pay off the loan," Bowne says. Then "unexpected things occur, and suddenly they can't make that payment every month."
So weigh the odds. Do you have the money to pay off the purchase in cash now? Can you set it aside, just in case? Is the purchase a want or need? Do you have other payment options?
Explore alternatives, like a low-interest credit card or a small personal loan, which may offer interest rates significantly cheaper than what you'd pay if you missed the deadline for eliminating a deferred-interest balance.
"You don't want to use it for hospital bills," says Chi Chi Wu, staff attorney with the National Consumer Law Center. Interest-free medical financing can carry high interest rates when the deferred-interest period expires, and many hospitals offer more reasonable payment plans and other options. And in a few states, alternate payment options are required for eligible patients, she says.
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Two balances can add complications
Sometimes, credit cards will allow you to carry two balances -- one for the purchases on which you have the deferred-interest arrangement, and one for purchases you make later.
What you might not know: Credit card issuers are required, unless you state otherwise, to put anything above the minimum toward the balance without the deferred-interest arrangement, says Wu. The only exception: During the last two months of the deferred-interest period, card issuers have to direct anything above your minimum to the deferred-interest balance, she says.
You only have a set amount of time to pay off your deferred-interest balance. If your payments are going toward the other balance, you're not making any headway.
The CPFB found that even consumers with good credit scores who carry multiple balances pay off their deferred-interest balance on schedule just 63% of the time.
One solution: Don't run two balances when making use of 0% financing. Until you pay off the deferred-interest balance, don't add to the confusion (and debt) by making more charges. Use a different payment method for new purchases.
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It pays to understand all the rules
Leave any of the balance unpaid, and you owe the interest that's accumulated over the last year, not just interest on your current balance, says Nick Bouke, director of the Pew Charitable Trusts' small-dollar loans project. That often surprises consumers, he says.
Additionally, if you make a payment 60 days late, you forfeit your deferment period and 0% financing. The new APR could be a penalty rate that's higher than the regular rate that would have kicked in once the deferment period ended, says Wu.
Another point that confuses some consumers: The final payment due date. Your billing cycle may not coincide with the end of your deferment period. In that case, be on the safe side by using the end of the deferment period as your due date. That date should be displayed on every bill, says Wu.
One solution: Set your own payoff plan to have it paid in full well before the due date.