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On first glance, a financing offer of "no interest for 12 months" and a credit card that advertises "0% APR for 12 months" seem to be giving you the same thing — a way to pay for something over time without worrying about finance charges. But there's a subtle difference that could end up costing you hundreds or even thousands of dollars.
That difference lies in the distinction between deferred interest and 0% interest.
What is deferred interest?
"No interest" financing is a staple of store credit cards and medical credit cards, while "0% APR" promotions are the norm with bank-issued cards.
When store and medical cards offer "no interest" financing for a certain period of time, they typically spell it out in the fine print as "no interest if paid in full" by the end of the promotional period. What that means is that interest is silently being calculated in the background (typically at a rate of 20% or higher), but the interest is suspended, or deferred, until later.
If the promotional period ends and you've paid in full — if your balance is zero — then you're fine. You won't be charged any interest. But if you still owe any money after the offer period expires — even if it's just 50 cents — you'll have to pay all the interest that's been adding up from the day of the purchase.
Financing offers that are phrased as "12 months same as cash" also represent deferred interest.
Deferred interest vs. 0% APR
By contrast, when a financing offer is presented as "0% APR," it means that during the promotional period, the interest rate that applies is literally 0%. There isn't any interest silently adding up in the background, because 0% of your balance is always $0.
If you've paid off your balance by the end of the promo period, you will have paid no interest — just like with a deferred interest offer. But if you have anything left over when the period ends, you will be charged interest only on the remaining balance and only going forward.
Say you need to buy some furniture for a new home, so you head to the store. The total comes to $3,000. At checkout, the clerk asks whether you want to open a store credit card with no interest if paid in full in 12 months and an ongoing interest rate of 20%. You accept, and you start paying it down at $250 a month. Somewhere along the line, though, you make a small mistake and pay only $240 one month. At the end of the 12-month period, you have a balance of $10. All the accrued interest, going back to the date of purchase, lands on your next bill, and now you owe about $325 in interest.
If you'd put the purchase on a new bank credit card with a 0% APR for 12 months and an ongoing interest rate of 20%, you would pay interest only on that leftover $10. That would cost you less than a dollar.
Only about 80% of deferred-interest offers on credit cards were paid down in full before their promotional period ended in 2020, according to the most recent data available from the Consumer Financial Protection Bureau. That means 1 in 5 people with such offers may have gotten socked with a big interest bill for what they thought was interest-free financing.
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How deferred-interest 'deals' trip you up
Payoff dates don't match payment due dates
It's easy to misjudge how much time you have to pay off your balance. For one thing, your payoff deadline probably won't coincide with your credit card bill's due date, according to a report from the National Consumer Law Center. For example, your no-interest promotion might expire on Jan. 3, but that month's credit card bill might not be due until the 15th. If you wait until your due date to pay, your last payment would come in after the no-interest period ended, potentially costing you hundreds of dollars.
Payments might go toward other balances
You might think you paid off your deferred-interest balance months ago. But that may not be the case if your card has multiple balances on it, as many deferred-interest cards do. Here's why: When you open the card account, the no-interest promotion applies to your initial charge. Anything you charge after that, however, might be subject to the card's ongoing interest rate. If so, the issuer may apply your payments first to those charges rather than the one that has the zero-interest clock ticking on it.
Suppose you use a deferred interest offer on a medical credit card to cover a dental surgery, then use the same card to pay for follow-up visits, which aren't covered by the deferred interest promotion. Under federal credit card regulations, your payments in excess of the minimum must go toward your highest-interest balance first. In this case, that's the follow-up visits that are subject to the ongoing interest rate. Those will get paid down first. Payments above the minimum wouldn't automatically be allocated to your deferred-interest balance until the last two billing cycles before the offer expires.
It can get complicated, but the upshot is simple: You think your debt’s long gone by the time the interest-free period ends, but you still get hit with an interest charge.
Ongoing interest rates are notoriously high
The high ongoing interest rates on deferred-interest cards tend to be above 20% "regardless of a consumer’s credit score," according to the CFPB report. That's considerably higher than what a person with good credit should expect to pay on a bank card. This makes retroactive interest even more expensive.
The longer the deferral period, the more these stealth charges can build up. For promotions lasting 25 to 35 months, retroactive interest can end up being around 50% of the cost of the original purchase, an earlier CFPB report noted.
What if you already have a deferred-interest card?
Deferred-interest credit cards come with unforgiving terms, but if you already have one, it doesn’t have to end badly. You can avoid the pitfalls by following these tips:
Pay off your balance early. Make a point of paying off your entire balance a couple of months before you need to — or even sooner, if you can swing it. If you’re not sure when your 0% period expires, read the disclosures on your statement or call the card issuer.
Don't use the card again until you've paid off the first purchase. Keep your deferred interest card just for paying down your initial purchase, to avoid the complexities of overlapping balances. This way, your payments will go where you want them to go.
Opt for paper statements. Electronic statements are easy to forget or ignore. Old-school bills make it easier for you to avoid surprises.
If you find you need more time to pay down your debt, consider moving it to a 0% balance transfer card. It will give you some breathing room, on simpler terms.