The Truth About Zero Interest Credit

6 months zero percent interest

You’ve seen the signs at retailers: No interest for six months, 1 year or longer. Typically zero interest credit opportunities are tied to the purchase of big-ticket electronics and furniture: a flat screen television, mattress or bedroom set.

Did you know that if you don’t pay off the item in full, during the no interest period, you will be responsible for all of the back interest during the so-called zero interest period?

And did you know that in some of these agreements, you are charged interest on the original purchase price, even if you’ve paid off a large portion of the purchase during the zero interest period?

This kind of credit should be called deferred interest credit, instead, since you are still responsible for the interest, you just don’t have to pay it during the initial period. Interest charged after the introductory period is often very high, and can range from 25 to 29 percent. Let’s look at an example.

How Zero Interest Cost Suzanne Big Bucks

Suzanne bought a bedroom set for $2500 with no interest for 12 months. She made $100 monthly payments during the introductory period, ending with a balance of just over half at $1300. Then the deferred interest at 29.99 percent kicks in. It is retroactively charged for the first 12 months on the entire balance, meaning she owes an additional $750 – bringing her balance back up to $2050. If she cannot make more than $100 monthly payments after the introductory period, it will take her 30 more months to pay off the debt. In total, it will take 42 months and she’ll have paid double for the furniture.

Data from the Consumer Financial Protection Bureau show that deferred interest purchases have grown in popularity since 2010. This is a disturbing trend.

Why You Should Avoid Buy Now Pay Later Merchandise Schemes

  1. You’ll pay more for items that are often promoted as sales: once you’ve paid the retroactive and current interest on your purchase, you’ll end up paying significantly more for something that was probably marketed as a sale or good deal.
  1. You Can Harm Your Credit Score: If you fail to understand the terms of your deferred interest purchases and find yourself hit, suddenly, with hefty interest and fees, you could end up missing payments and harming your credit score.
  1. Finance Needs, Not Wants: A good rule of thumb in this situation is to finance your needs (housing, a car) and not your wants. Never borrow money for electronics, furniture or other goods that can be bought later, cheaper or not at all.
  1. If you find yourself tempted: sleep on it (and we’re not talking about a deferred interest mattress). Don’t let a savvy salesperson talk you into a bad decision. Sleep on it for a few nights. The impulse to buy will probably go away.
  1. Life Happens While You Are Making Payments. You may have the best intentions to pay off a purchase before the big day when the interest hits, but guess what? Life happens! Your car could need costly repairs, you could lose your job, or have a baby or have to fix a leak in your home. All of these things cost money and could divert you from your best intentions. Save yourself and just say no to these kinds of deals.

The only way to avoid the interest altogether is to pay off the purchase during the introductory period. We recommend skipping these opportunities and delaying your purchase, not your interest, until you have the money to buy these goods.

Sources:

http://www.consumerfinance.gov/blog/you-could-still-end-up-paying-interest-on-a-zero-percent-interest-credit-card-offer/

Karen Carlson
kcarlson@incharge.org

Karen Carlson is a personal finance expert and writer. Her financial advice has been published in Time, US News & World Report and Fox Business News. Carlson is an Emmy Award-winning producer of educational television and recent nominee for NFCC Financial Educator of the Year.