The advertisements are everywhere: “No Interest if paid in full within a specified number of months…” These deferred interest plans sound like a good deal? Not so much. Here’s the trap: if a deferred interest credit card is not paid in full before the specified time, the entire amount of the deferred (unpaid) interest – which has been accumulating since the day you brought home that new TV or sofa or appliance – is added to the remaining balance. This can add hundreds of dollars to the purchase price.
Click here to see a story featuring a consumer who got burned by a deferred interest credit card.
Deferred interest credit cards often carry significantly higher interest rates than regular cards – some charge interest rates of up to 30%. So if you pay a bill late or fail to pay it off on time, you could be buried under an avalanche of unexpected debt. One study found that financing costs on deferred interest accounts can increase more than 27 times as the result of paying off an account just one month behind schedule.
Even people with good credit can get caught in a deferred interest trap. According to a recent Consumer Financial Protection Bureau (CFPB) report, about three in ten consumers with prime credit failed to pay off a balance on a deferred interest plan. The numbers were even worse for folks with dinged-up credit. About four in ten consumers with credit scores below 620 got caught in a deferred interest debt trap. That feels like exploitation, as those who are struggling with debt are the least able to meet the demands of a deferred interest program.
So what’s to be done?
Better disclosures will not fix the problem. Regular credit card disclosures are notoriously hard to read – in an August 2012 survey by JD Power and Associates, not even half of credit card customers say they “completely” understand their credit card terms, and of those consumers, more than two-thirds said they do not understand their cards’ interest rates. Given the added complexity of a deferred interest plan, improving disclosures won’t do enough. We think deferred interest credit cards are abusive and confusing to consumers, and should be banned. In fact, we said so in our comments to the CFPB earlier this year.
Our advice this holiday season: seek out alternatives. Is the purchase something you can save up for? If not, put the charge on a low-interest rate credit card. The same CFPB report cited above found that deferred interest plans can be more expensive than charging the purchase to a general purpose credit card. You may save some money and headaches. Happy holidays!