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Why you should avoid deferred interest offers

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Whether embarking on holiday shopping early or contemplating a substantial purchase, the shadow of elevated inflation looms over consumers. This year’s persistent inflationary pressure implies that your holiday shopping expenses will likely be higher. Consequently, consumers are on the lookout for cost-saving opportunities. According to a survey, 87 percent of consumers actively seek ways to trim their expenses, with 41 percent actively pursuing coupons, discounts, and sales.

In pursuing these savings, you may encounter a deferred interest offer from a retail store and wonder if it’s a prudent choice. Although such promotions may appear as a remedy for the financial strain induced by inflation, it’s crucial to acknowledge that you could end up paying more for your purchase. Therefore, it’s essential to carefully assess the risks associated with deferred interest and explore potential alternatives.

How deferred interest offers work

Enrolling in a deferred interest credit card offer means you won’t incur interest charges during a specified period, typically spanning six to 12 months. If you manage to settle your entire balance within this timeframe, you’ll escape any interest fees on your purchase.

While the prospect of interest-free payments might appear enticing, it’s not always as advantageous as it seems. The lender continues to calculate interest during this promotional period, and should you carry any portion of the balance past its expiration, you’ll be responsible for the accrued interest.

For example, if you purchase a $2,000 laptop with a deferred interest offer and manage to pay off $1,900 by the end of the promotional period, you’ll still be liable for the interest that has accrued on the sum you’ve already paid off. Moreover, you’ll continue to accrue interest on the remaining $100 balance and the previously accrued interest.

It’s important to note that a deferred interest promotion differs from a 0 percent promotional interest card, as the latter doesn’t accumulate retroactive interest. Once your 0 percent promotion concludes, you’ll only pay interest on the outstanding balance in the future; there won’t be any retrospective interest applied.

Risks of deferred interest

Taking advantage of a deferred interest promotional deal often hinges on the assumption that you’ll successfully clear your entire balance before the promotional “no interest” period expires. These offers may be phrased as “no interest if paid in full within 12 months,” but that “if” carries significant weight, creating an opportunity for the card issuer to profit.

Consider this scenario: In an uncertain economic climate where a recession looms, what if you lose your job and can’t settle your balance before the promotion’s conclusion? Or, what if unexpected expenses like a car repair or medical bill take precedence?

Upon closer examination of the offer’s fine print, you may discover that missing a monthly payment could prematurely terminate the promotional offer. In such an event, you’ll likely be obligated to pay all the accrued interest that has accumulated, potentially elevating your already high-interest rate.

Additionally, if you have other balances on your credit card, such as purchases or cash advances, any payments exceeding the minimum due may not necessarily be directed towards reducing your deferred interest balance.

According to the Credit Card Accountability Responsibility and Disclosure Act, when you make a payment exceeding the minimum required monthly amount, the card issuer must allocate the surplus to the balance with the highest interest rate. For instance, if you’ve incurred a cash advance with an exceptionally high-interest rate, any extra payments would be directed toward reducing that balance.

An exception applies to deferred interest payments, but you must communicate your preference to the lender. When discussing this with your lender, specify that you want your additional payments toward your deferred interest balance.

However, for the two billing periods leading up to the conclusion of the promotion, the law mandates that your lender must automatically apply your excess payments to the deferred interest balance, even if you haven’t explicitly chosen this option.

Tips to better manage your deferred interest promotion

Prior to committing to a deferred interest promotion, it’s crucial to ensure that you can fully clear the balance by the conclusion of the promotional period. Calculate the required monthly payment that will enable you to achieve this goal. Simply making the minimum payment will leave you with a remaining balance when the promotional period expires.

If you have additional balances, get in touch with your card issuer and specify that you want any surplus payments beyond the minimum to be directed toward reducing your deferred interest balance.

Another practical step is to establish automatic payments from your bank account, guaranteeing you never miss a monthly payment. Additionally, thoroughly scrutinize the fine print of your offer to identify any specific terms or conditions you need to be vigilant about.

Alternatives to deferred interest offers

If you’re worried about the possibility of being unable to settle your deferred interest balance in full when the promotional period concludes, there are safer alternatives available. These alternatives can provide lower long-term interest costs or allow you to spread your expenses into more manageable payments, thus assisting in budget management and savings.

  1. 0 Percent APR Credit Cards: One option is to apply for a 0 percent APR credit card in advance and use it for substantial purchases, sidestepping deferred interest offers. These cards typically offer a more extended introductory APR period, ranging from six to 21 months, before transitioning to their standard APR. Importantly, interest only accrues on the remaining balance on the card if you fail to pay it off before the introductory APR period expires.
  2. Buy Now, Pay Later: Popular buy now, pay later services such as Afterpay, Affirm, Klarna, and PayPal allow you to divide substantial purchases into smaller, interest-free payments over time. Some also offer monthly payment options with APRs and additional fees.
  3. Personal Loans: While personal loans do involve interest charges, they generally feature lower interest rates compared to credit cards or the interest accrued on deferred balances. It’s advisable to explore various personal loan options to avoid unnecessary fees or high interest rates that might negate the advantages.
  4. 0 Percent Balance Transfer Card: If you can’t clear your deferred interest offer within the promotional period, consider applying for a 0 percent balance transfer card. This approach grants you additional time to pay off the remaining balance without accumulating interest during the introductory APR period.
  5. Home Equity Loan: If you own a home and can’t settle your deferred interest before the promotional period expires, another viable option is to utilize a home equity loan.

These alternatives provide more flexibility and often result in lower overall interest costs than deferred interest arrangements. It’s essential to assess your financial situation and goals when selecting the most suitable option.

The bottom line

As you prepare for the holiday season or seek ways to counter inflation with cost-saving opportunities, exercise caution when considering deferred interest promotions. While you can escape interest charges by clearing the full balance before the promotion concludes, there are risks if you fall short. If you decide to proceed with such an offer and discover you still have a balance when the promotion period concludes, it’s advisable to explore alternative financing options to prevent incurring substantial interest fees.

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