Black Friday is approaching and so are the busiest shopping days of the year, while consumers are expected to shell out their plastic more than last year. Sales are forecast to jump by 4 percent over last holiday season.
In response, retailers this time of year are quick to offer “deferred interest plans” — also billed as “0% Interest for 12 months (or longer)” or “Special Financing.” Most often, these plans are offered on branded, retail store credit cards.
The promotions refer to financing arrangements which require substantial fine-print reading to avoid getting hit with higher-than-normal interest charges, if you don’t pay off the specific amount before the promotional period ends.
While these plans seem like traditional “0% credit card offers”, there’s a crucial difference:
Cardhub.com puts it this way:
“These plans sound great but the fine print reveals how financially disastrous they can be since the regular rate applies retroactively to the entire original balance, if you do not pay in full by the end of the promotional period, or you make a late payment, no matter how much of the balance you have already paid back.”
If the promotional period is long enough, consumers may simply forget to pay off the amount. Or, they can’t pay it off, and they get hit with hefty card-lending charges.
CardHub.com’s deferred interest study found that 70 percent of major retailers offer a financing option.
However, the best deals come from retailers that do not use deferred interest, which include: Target, Nordstrom, and Gap.
The worst deals come from retailers that not only offer deferred interest, but also are not transparent about their policies – a list that includes the likes of Pottery Barn, Amazon.com, Lowe’s, and Macy’s.
Here is an example from CardHub of a regular credit card promotion vs. a deferred interest promotion:
Suppose you open a new credit card to buy a couple of big-ticket items on your kids’ Christmas list – a laptop and a bicycle totaling $800, for example. If you choose a traditional credit card that offers 0% on new purchases for six months and charges a 20% regular interest rate and you miss your payoff goal by one month (paying off your total balance in seven months instead of six), you’ll pay $2 in interest.
However, if you choose a card that offers deferred interest, you’ll not only pay 27.5 times more interest (i.e. $55), easily eradicating any Black Friday deals you might have scored, but it will also take you an additional month to become debt free.
Here are other key findings from CardHub.com:
- Of the major retailers providing financing, 49% currently offer a deferred interest plan.
- Of those that currently offer deferred interest, 41% scored very low on our transparency scale (between 0 and 6 points) because they bury information about the deferred interest plans in footnotes or terms and conditions pages.
- Of those that currently offer deferred interest plans, 29% had complete and easily accessible information about the terms of their deferred interest plans on their websites. These retailers received a high transparency score (10 points).
- The average transparency score for all of the retailers currently offering deferred interest plans was 7 points.
- Pottery Barn had the lowest transparency score (0) with all key information about their deferred interest plan buried in very hard to find disclosures.
- 14% of retailers do not have an active deferred interest plan at this time but include information about such plans in their disclosures, indicating they may offer such plans at some point or that the offer is limited to in-store applications.
- Combined, Citi and GE Capital issue nearly two-thirds of the deferred interest credit cards (or cards that may offer deferred interest in near future), comprising 32% of the market each.
- Under a deferred interest payment plan, paying off your credit card debt one month behind schedule could increase your financing costs by more than 27 times.
- Despite not having a deferred plan themselves, several retailers offer the ability for consumers to make payments through PayPal, which offers a “Bill Me Later” deferred interest option.