What is deferred interest and is it worth it?

Deferred interest offers are similar to no-interest offers, providing financing without credit card interest charges for a promotional period. However, they are fundamentally different, and it’s important to understand how.

Deferred interest means the issuer keeps track of the interest from day one, and if you don’t pay off the entire balance by the end of the promotion, you’ll be charged all of the accumulated interest at once (even if you only owe a penny of the original amount).

What is deferred interest?

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 grace period that you can forgo paying the interest that’s been accruing from the original date of purchase.

In contrast, a 0 percent introductory offer only starts charging interest on any remaining balance at the end of the introductory period of a credit card.

How to tell if your credit card charges deferred interest

Store cards and co-branded cards are more likely to dangle deferred interest promotions than other cards. You’ll typically encounter deferred interest financing offers when you shop for a big-ticket item like a refrigerator, computer or television.

They are often marketed as “no interest” offers, and it’s essential to read the fine print to see if it’s actually a deferred interest plan. The details could actually state “no interest if paid in full” or “deferred interest.” You could check out your online account for the terms of credit too. If you have any doubts, you could also follow up with a call to the card’s customer service.

Let’s examine how deferred interest works so you can decide whether you should take advantage of offers featuring this type of financing.

How does deferred interest work?

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, featuring marketing phrases such as “no interest for 12 months” or “same as cash.”

Deferred interest loans are enticing because you won’t pay interest for a set term, whether it’s six months or two years. But, if you don’t pay off the entire balance by the end of the offer period, or if you’re late on a payment, you’ll be on the hook for all the interest that started accruing on the full balance from the day you signed.

Let’s say you need a new refrigerator. You can pay $1,800 upfront or take the store’s deferred interest offer with “no interest for 24 months” and a 25.99 percent regular APR. If you pay $75 each month for 24 months, you can repay the balance and avoid interest charges.

But what if life throws you a curveball — like a medical emergency or an unexpected loss of income — and you’re unable to repay the balance during the promotional term? In that case, you’d suddenly see an extra $900 or so added to your balance — the interest that accrued during the offer period.

Because the regular interest rate is often very high with deferred interest offers, the lump sum amount can be excessively high. While many borrowers pay off their entire loan on time, many don’t (which is how lenders profit from “no interest” promotions).

Deferred interest vs. 0% APR

The key difference between 0 percent APR intro offers and deferred interest promotions is what the issuer does with the interest during and after the promotional period. While both options can potentially help you save money on interest fees, a 0 percent APR offer could provide the most savings.

With 0 percent APR offers, the issuer doesn’t apply the regular interest rate to your balance until the no-interest period expires. Let’s say you charge $2,000 to a card with a 0 percent intro APR for the first 12 months. During the intro period, you’re able to pay $1,000 toward your balance. At that point, you owe the remaining $1,000 left on your balance, plus the interest that kicks in going forward.

With a deferred interest offer, on the other hand, you’ll have to pay interest that applies on the remaining $1,000 moving forward as well as all the interest accrued on the entire balance from day one.

Pros and cons of deferred interest

As with any offer of credit, it’s wise to weigh the benefits and downsides of deferred interest offers to help determine if they’re a good or bad option for you.

Pros of deferred interest

While it’s usually best to avoid deferred interest offers, they may be helpful in select circumstances: 

• Easier to qualify. Deferred interest offers often are easier to qualify for than many credit cards. If you have poor credit or fair credit and don’t qualify for better options, you might consider a deferred interest offer to fund an essential purchase like an air conditioning unit or a refrigerator — as long as you can repay the balance on time.

• Potential to save money. You could eliminate interest charges, but only if you’re certain you’ll be able to pay the entire balance before the promotional period expires.

Cons of deferred interest

While deferred interest offers may be a convenient way to make large purchases on a credit card, 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, backdated to the date of the transaction.

• High interest rates. The current average credit card interest rate is above 20 percent, with many of the best 0 percent APR credit cards offering ongoing interest rates between 12 percent and 24 percent on any remaining balance at the end of the promotional period. Deferred interest offers often come with interest rates exceeding anywhere from 25 percent to 29 percent.

• Fine print details. As with any credit card offer, you should always read the fine print for any special requirements with a 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.

How to avoid paying deferred interest

Here are a few tips to help you avoid deferred interest charges:

• Do the math. Figure out how much you should pay each month to cover the cost of the deferred interest offer before the no-interest period 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 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.

Is deferred interest worth it?

It’s generally best to avoid deferred interest offers in favor of safer options. Remember, if you’re late on a payment, or if you fall even one penny short of repaying your balance in full within the promotional period, you’ll be on the hook for significant interest charges. The regular interest rate on deferred interest rates is commonly 25 percent or higher.

Unless you’re completely sure you can repay your full balance on time, these deferred interest promotional offers can backfire and cost you considerably. If you have to make a major unplanned expense, a 0 percent APR credit card or a low-interest personal loan could be a safer choice.

The bottom line

Deferred interest credit cards are only a good idea if you can actually avoid paying the interest. Read the fine print to avoid any surprises, and repay the balance during the promotional period. If you can manage to 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, you’ll be on the right track.