When you shop for a big-ticket item like a refrigerator, computer or television, a retailer may offer no-interest financing with a loan or credit card. While merchants market these offers as “no interest,” the more accurate description is deferred interest. If you don’t pay off the entire balance by the end of the promotional period, you will be charged all the interest that started accruing on day one.
Deferred interest offers can be useful but you should only proceed if you are absolutely certain you can pay off the full amount before the period ends to avoid being charged retroactive interest on the entire balance.
Let’s examine how deferred interest works and what to look out for so you can decide whether or not you should take advantage of offers featuring this type of financing.
What is deferred interest?
Deferred interest loans and credit cards are standard at retailers that sell expensive products like appliances, electronics and furniture. Many businesses trot out these offers during the holidays, when consumers may be tight on cash while shopping for loved ones, with marketing phrases such as “no interest for 12 months” or “same as cash.”
Deferred interest means you can borrow money and the interest you owe is delayed (but not absolved) for a period of time. It’s only when you pay off your balance by the end of the promotional period that you can forgo the interest. Otherwise, you will be on the hook for all the interest that started accruing from the original date of purchase.
Be aware; some creditors may immediately revoke the deferred interest offer if you make a single late payment, so it’s essential to make on-time payments every month.
The downsides of deferred interest
While deferred interest credit card offers may be a convenient way to buy goods you aren’t able to pay for with cash, they do come with some considerable downsides, including:
- Retroactive interest charges: If you don’t repay the entire balance before the promotional period ends, you’ll have to pay interest not only on the remaining balance but on the original purchase amount, backdated to the date of the transaction.
- High interest rates: Deferred interest offers often come with interest rates exceeding 20 percent once the no-interest period expires.
- Payment stipulations: Under the Credit CARD Act of 2009, credit card companies must first apply payments over the minimum to your highest interest rate. That means that if you’re continuing to use your deferred-interest credit card beyond a large initial purchase, any extra payment over your monthly minimum may go toward transactions on your credit card with a higher purchase annual percentage rate (APR). There is an exception, however: Your payments must be applied toward your deferred interest balance during the last two billing cycles before your no-interest period ends.
- Contingencies: As with any credit card offer, you should always read the fine print for any special requirements with any deferred interest offer. For example, the credit card company may include language in your agreement that voids the deferred interest offer if you submit a late payment. Make sure to read the terms and conditions and contact your creditor to get answers to your questions.
How to avoid paying deferred interest
Taking advantage of deferred interest offers may be a good idea if you can repay the debt fully and avoid retroactive interest charges. According to the Consumer Financial Protection Bureau (CFPB), 80 percent of consumers who use their credit cards for these offers repay their balance before the promotional period ends. But that means one in five people still end up being charged all of the accumulated interest on their balance.
Here are a few tips to help you avoid deferred interest charges:
- Do the math: Figure out how much you would have to pay each month to cover the cost of the deferred interest offer before the no-interest time frame is over.
- Set up automatic payments: Since many deferred interest offers may be negated with even one late payment, eliminate any room for error by setting up automatic payments that post to your account before your monthly due date.
- Pay more than the minimum: If you use your credit card to purchase a big-ticket item with deferred interest, chances are your minimum payment will not be enough to repay the balance in full before the promotional period ends.
- Consider an alternative payment method: If you don’t want to risk paying high-interest rates once the promotional period ends, consider using a personal loan or a credit card with a 0 percent introductory offer.
0% APR vs. deferred interest
These two “no interest” offers are quite similar with one very important difference. Both 0 percent APR cards and deferred interest offers allow you to charge or borrow money with no interest required for a set period of time. The key difference is in what the issuer does with the interest during and after the promotional period.
When you get a 0 percent APR card and use it to make purchases (or transfer a balance), no interest accumulates during the promotional period. It’s only once the no-interest period expires that the issuer starts applying the regular interest rate to your remaining balance and all transactions from that date forward.
With a deferred interest offer, on the other hand, the issuer starts calculating interest on the purchase from day one, even though it’s not charging you—yet. Those interest charges are simply set aside until the promotional period ends. If you pay off the entire balance before that time, you can walk away without having paid any interest. If, however, you owe even a single penny on your balance at the end of the offer, you will be charged the full amount of interest that started accumulating on your entire balance from the very first day of the offer.
Is a deferred interest offer a good idea?
Deferred interest credit cards are only a good idea if you can avoid paying the interest. Read the fine print to avoid any surprises, and repay the balance during the promotional period. Pay more than the minimum, set up automatic payments and follow other strategic measures to prevent the shock of a credit card bill with a lump sum of deferred-interest charges.
If you’re not sure if you can repay your purchase in full during the promotional period, it’s best to avoid a credit card with a deferred interest offer. Instead, consider other alternatives such as saving up for a purchase or utilizing a credit card with a 0 percent introductory offer with no deferred interest.