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

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.

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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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