Why You Need to State 'no' to no-interest deals
GE shifts strategy targets for business after misstepsAugust 28, 2017
Interest postponed is interest denied
The problem with deferred-interest credit cards of the CFPB is that the conditions can be misleading. With a normal 0% interest credit card, it’s usually tied to a promotional offer in which the interest is waived for a period of time.
But using a deferred-interest deal, if you pay the entire loan the interest is forgiven. Under federal law, that deferment period needs to be at least six months.
So what happens if you do not pay the balance in time off or miss a payment?
“This is not a zero percent loan before the end of the promotional period,” says Lauren Bowne, staff attorney for Consumers Union. “The interest is truly accruing, and the bank is just waiving the interest payments.”
You might think you are getting an interest-free interval, but if you skip a payment or pay late, you get penalized with the accumulated interest added retroactively to your balance in a lump sum. And you will pay attention to the preset rate.
That can ditch your debt, since the rate of interest on credit cards that are deferred-interest is generally around 25%, according to the CPFB. That is roughly 8 percentage points higher than the average variable rate on traditional credit cards of 16.49 percent.
What’s more, fewer consumers are paying off these loans the CFPB found. For 6- and 12-month offers approved in 2013, cardholders paid roughly 75% in time off, down from nearly 80% for offers originated in 2010.
Consumers with credit scores fared worse: Less than half paid their balance off until the end of the promotional period.
If you are not sure you can pay off a deferred-interest balance in time, calculate how much it would cost you to finance your purchase using a credit card you already have to learn whether this would be a better choice.
Your credit could hurt
Many times, that line of credit on your new card is equal to the total you are purchasing, Bowne states.
So, in essence, “you are opening up a maxed-out credit card, which doesn’t look good in your credit report,” she says.
It may damage your credit score.
Here’s why: One of the critical factors that can help determine your credit score is your credit utilization ration, which is the difference between how much credit has been extended to you versus how much credit you are using. In general, the more of your credit you use, the lower your score will be.
To learn how a 0% funding offer would affect your credit, ask the issuer if it is going to report the account as a loan for a period or a revolving account. Maxing out a loan will have a bigger impact.
Consider your own situation, when you get the answer. It might be cheaper to skip opening a new account, pay cash and preserve your credit score if you are planning a major purchase including a home or automobile, in the year.
It’s smart to consider your options
You may plan to repay that deferred-interest loan before the promotional period expires, but life gets in the way.
“What we’ve seen over the past few years is that people have every intention and ability to pay off the loan,” Bowne states. Then “unexpected things happen, and suddenly they can’t make that payment each month.”
Weigh the odds. Have you got the money to repay the purchase in cash? Can you set it aside, just in case? Is the purchase a desire or need? Do you have other payment choices?
Explore options, like a low-interest credit card or a small personal loan, which may offer interest rates significantly cheaper than what you’d pay if you missed the deadline for eliminating a deferred-interest balance.
“You don’t want to use it for hospital bills,” says Chi Chi Wu, staff attorney with the National Consumer Law Center. When the period expires, financing can carry interest rates, and many hospitals provide payment plans and options. And in a few states, alternate payment options are required for patients, ” she says.
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Complications can be added by two accounts
Credit cards will allow you to carry one for purchases you make later — one for your purchases on which you have the arrangement, and two accounts.
What you might not know: Credit card issuers are required, unless you state differently, to put anything above the minimum toward the equilibrium without the arrangement, says Wu. The sole exception: During the last two months of the period, card issuers must direct anything above your minimum to the deferred-interest balance, she says.
You have a set amount of time to pay off your equilibrium. You are not making any headway if your payments are going toward the balance.
The CPFB found that customers with good credit scores that carry multiple accounts pay off their equilibrium on schedule of the time.
1 solution: Do not run two accounts when using 0% funding. Until you pay off the deferred-interest balance, do not increase the confusion (and debt) by making more charges. Use a different payment method for purchases that are new.
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It pays to understand of the rules
Leave any of the balance unpaid, and the attention that is accumulated over the last year, not only interest on your current balance is owed by you, says Nick Bouke, director of the Pew Charitable Trusts’ small-dollar loans project. Consumers often surprise, he says.
Additionally, if you make a payment 60 days late, you forfeit your deferment period and 0% funding. The APR could be a penalty rate that is higher than the normal rate that would have kicked in when the deferment period finished, says Wu.
Another point that confuses some customers: The last payment date. Your billing cycle and the conclusion of your deferment period may not coincide. Be by using the end of the deferment period as your date on the side. That date should be shown on each invoice, says Wu.
1 solution: Establish your payoff plan to have it paid in well before the due date.