credit cards

Why 0% financing from retailers can be a bad deal

Interest postponed isn't necessarily interest denied
Interest postponed isn't necessarily interest denied | seraficus/E+/Getty Images

Interest postponed isn't necessarily interest denied

"This isn't a 0% 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."

How the plans work: 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 6 months, says Wu.

If the balance isn't paid within the deferment period, the interest that's been accumulating is added "in a lump sum" to your balance, says Bowne. Going forward, you pay interest at the preset rate.

That can become a huge problem, as the interest rate on deferred-interest credit cards "is generally around 25%," according to the CPFB.

What's more, fewer consumers are paying these loans off during the promotional period, the CPFB 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.

Smart move: 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.

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Editorial Disclaimer: The editorial content is not provided or commissioned by the credit card issuers. Opinions expressed here are author’s alone, not those of the credit card issuers, and have not been reviewed, approved or otherwise endorsed by the credit card issuers.

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