If you’ve ever been swayed into signing up for a store credit card because of the promise of free 0% financing, you’re not alone. A MagnifyMoney study found that over 50% of store credit cards offered promotional financing during the holiday season, which remains popular because consumers tend to respond positively to that 0% promise.
So what’s the problem? For starters, 87% of the stores offering these types of promotions use deferred interest, and the average interest rate on these types of cards tend to be around 24.8%, or about twice the average interest rate of a regular credit card. That could mean big bucks wasted if you don’t pay careful attention.
Here’s what you need to know to avoid getting duped in the future or how to successful deal with a card you already got during the holidays.
What is Deferred Interest?
Cards that make use of a deferred interest system can quickly go from what seems like a dream to a debt-producing nightmare if customers aren’t wary. The trick: If a customer makes purchases with a new store card that uses deferred interest and does not pay their balance in full before the end of the promotional period of that card, they will be slapped with a retroactive interest rate, which are often the highest interest rates on the market.
Psychology Isn’t On Your Side
Falling for the trap of signing up for something that touts an offer of free — even when other aspects of product are so obviously not great — is one of the oldest tricks in the book. For example, Nick Clements, co-founder of MagnifyMoney, marketed credit cards to consumers for almost 15 years before leaving to start his company. In one particular direct mail test he worked on, customers were offered a card with 0% interest for six months, along with a 4% balance transfer fee and a go-to interest rate of 18.99% after the promotional period ended. The second card offered a flat interest rate of 6% over the life of the balance. Despite the overwhelming fact that the 6% interest card offered the better overall benefits, the majority of people went with the 0% offer anyway.
Worried you might have signed up for a card with deferred interest during the holidays? You can find a list of some of the stores whose cards use a deferred interest system, along with more information on exactly how deferred interest cards work, check out this story on MagnifyMoney.
So All 0% Interest Cards Are Bad Then, Right?
Not necessarily. While it’s true that most store credit card offers use the tricky deferred interest offers, other bank and credit union 0% offers tend to be generally pretty good. In fact, if you need to make a really big purchase this holiday season, opening a 0% interest card for that purchase alone, and then making sure to pay it off in full before your promotional period ends, may be one of the better ways to do so. For example, it’s possible to find 0% deals with as long as 21 months to pay off the balance, and if you’re careful you can find cards that waive any interest fees during your promotional period, as opposed to deferring them. This means that even if you can’t pay off your balance during the promotional period, you won’t be hit with a big fee when it’s over.
For a list of some of the best 0% interest cards on the market today, check out this MagnifyMoney story
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