Deferred Interest vs. 0% APR: How ‘No-Interest’ Credit Cards Can Be Costly

Some cards charge retroactive interest if your balance isn't paid in full by the end of the 0% period.
Nov 14, 2016

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Nothing sounds better than interest-free financing when you're struggling to pay for, say, a new washing machine or an expensive medical procedure. Credit cards from stores and certain medical offices that offer "no interest if paid in full" within a certain period appear to be a painless way to stretch out your payments without worrying about interest.

But if you aren't careful, these so-called no-interest offers could end up costing you hundreds of dollars in interest. You might be better off avoiding them altogether.

Deferred interest vs. 0% APR

Store credit cards and medical credit cards don't waive the interest on your purchase, like 0% annual percentage rate cards from banks do. Instead, they push it aside until later, or defer it. The interest is still being calculated in the background, but you aren't being charged for it. Not yet, at least.

If you've paid off your balance in full when that deferred-interest period ends, you're fine. You won't owe 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. That could be hundreds of dollars.

By contrast, if you have a 0% APR card from a bank, no interest will accumulate as long as the promotional period is in effect. Once the promotional period ends, the normal interest rate kicks in, but only from that date forward.

Only about 75% of deferred-interest offers were paid down in full before their promotional period ended in 2013, according to the most recent data available from the Consumer Financial Protection Bureau. That means 1 in 4 people with such offers may have gotten socked with a big interest bill for what they thought was interest-free financing.

Here's how deferred-interest "deals" can snag you.

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.

Say you used a one-year deferred-interest promo on a store card with a 24% APR to buy a $2,000 living room set. If you finished paying it off just one billing cycle after the promotional period ended, $310.55 in interest could show up on your next bill all at once, according to the NCLC report.

If you made the same mistake with a 0% APR credit card from a bank, you'd owe interest only on whatever portion of your balance was still unpaid.

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, you get the no-interest promo on your initial charge. Subsequent charges, however, might be subject to the card's ongoing interest rate. If so, the issuer will apply your payments 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 "24% to 26%, 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, the CFPB report notes.

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 your 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 APR card. It will give you some breathing room, on simpler terms.

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