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Whether you’re getting your holiday shopping started early or are looking to make a large purchase, inflation, which has been running high, is a factor weighing on consumers’ minds. This year’s ongoing inflation means you will likely pay more for your holiday shopping. That leads consumers to seek deals. Bankrate found that 87 percent of consumers are actively looking for ways to save money, causing 41 percent to seek out coupons, discounts and sales.
In the quest for such deals, you may come across a deferred interest offer from a retail store and wonder if it’s a good idea. While this sort of promotion might seem to be the answer to your inflation-influenced cutbacks, you might end up paying more for your purchase, making it important to consider the risks of deferred interest and potential alternatives.
How deferred interest offers work
When you sign up for a deferred interest credit card promotion, it means you won’t pay interest during a specific period, typically from six to 12 months. If you pay off your entire balance during this period, you won’t owe any interest on your purchase.
Getting away without paying any interest may seem like a good deal, but that’s not always the case. The lender will continue to tally the interest during this promotional period, and if you still carry even part of the balance at the end of this period, you will also have to pay the interest that has built up.
For instance, if you buy a $2,000 laptop on a deferred interest promotion and have paid off $1,900 at the end of the promotional period, you would still be on the hook for the accrued interest on the amount you have already paid off. And you would continue to pay interest on the $100 remaining balance as well as the accrued interest.
A deferred interest promotion is different from a 0 percent promotional interest card in that no back interest accrues with the latter. When your 0 percent promotion ends, you will only pay interest going forward on the balance you owe. Interest will not apply on a retroactive basis.
Risks of deferred interest
You may take on a deferred interest promotional offer based on the assumption that you will pay off the entire balance before the promotional “no interest” period ends. An offer might be along the lines of “no interest if paid in full within 12 months.” That’s a big “if” though, and that’s where the card issuer can cash in.
For instance, with all the speculation about recession, what if you lose your job and can’t pay off your balance before the promotion ends? Or, what if you have an unexpected car repair or medical expense that you have to prioritize instead?
If you read the offer’s fine print, you may find the promotional offer ends if you miss a monthly payment. If that happens, you’ll likely be on the hook to pay all the accrued interest that has built up. Your high interest rate could even get higher in this case.
And if you carry other balances, such as purchases or cash advances on your credit card, payments you make above your minimum payment are not necessarily applied to your deferred interest balance.
The Credit Card Accountability Responsibility and Disclosure Act states that when you make more than your minimum required monthly payment, the issuer should apply the excess amount to the balance with the highest interest rate.
That means, for example, that if you’ve taken out a cash advance with a punishingly high interest rate, the issuer would apply that excess payment toward the balance. There is an exception for deferred interest payments, but you would have to talk to your lender. When you do, mention that you want your excess payments to be applied to your deferred interest balance.
For the two billing periods before the promotion ends, though, the law requires your lender to automatically apply your excess payments to the deferred interest balance, even if you don’t specifically choose that option.
Tips to better manage your deferred interest promotion
Before you go for a deferred interest promotion, make sure you will be able to pay off the entire balance by the end of the promotional period. Calculate how much your monthly payment should be to pay off the amount. Just making the minimum payment means you will still have a balance when the deal period ends.
If you carry other balances, contact your card issuer and let them know you want any excess payments above the minimum to be applied to your deferred interest balance.
You could also set up automatic payments from your bank account so you never miss a monthly payment. And be sure to read the fine print of your offer to find out what you need to watch for.
Alternatives to deferred interest offers
If you’re concerned about the possibility of not paying your deferred interest balance in full at the end of the promotional period, there are less risky alternatives. Alternatives to deferred interest can offer lower interest over time or split up purchases into more manageable payments to help you manage your budget and save money.
- 0 percent APR credit cards: Applying in advance for a 0 percent APR credit card and then using the card to make larger purchases can help you avoid deferred interest offers. 0 percent APR cards typically have a longer introductory APR period — anywhere from six to 21 months — before transitioning to their standard APR. Interest won’t accrue for the entire balance of the purchase either, only the remaining balance on the card should you not repay it before the introductory APR ends.
- Buy now, Pay later: Afterpay, Affirm, Klarna and PayPal are some of the most popular buy now, pay later options to help you split larger purchases into smaller amounts over time. All four companies offer an interest-free pay-in-four option, while some monthly payment options come with APRs and additional fees.
- Personal loans: While you’ll pay interest on personal loans, they typically offer lower interest rates than credit cards or interest charged on a deferred balance. Before getting a personal loan, review the best options to avoid extra fees or high interest rates that could offset the benefits.
- 0 percent balance transfer card: If you can’t pay off your deferred interest offer during the promotional period, consider applying for a 0 percent balance transfer card. Doing so will give you more time to pay the remaining balance without accruing interest during the introductory APR period.
- Home equity loan: Another alternative if you can’t pay off your deferred interest before the promotional period ends is using a home equity loan if you’re a homeowner.
The bottom line
If you’re gearing up for the holiday season or just looking for deals to combat inflation, don’t jump too fast at deferred interest promotions. You can avoid paying interest if you pay off the entire balance before the promotion ends, but there are pitfalls if you don’t. If you do go for such an offer and find you’re carrying a balance when the promotion ends, look for alternative financing to avoid hefty interest charges.