Why You Should Avoid Deferred Interest Offers

As the holiday season approaches, consumers are getting ready to buy gifts. People started shopping as early as August, according to a recent Bankrate holiday shopping habits survey for 2022.

The grinch of inflation, at its highest in 40 years, is a factor that weighs on the minds of consumers this year. This year’s inflation epidemic means you’ll likely pay more for your holiday shopping. This drives consumers to search for deals. Bankrate found that 95% of consumers are actively looking for ways to save money, leading 52% to look for coupons, discounts and sales.

In searching for such offers, you may come across a deferred interest offer from a retail store. You should think twice before accepting such offers. While this type of promotion might seem like the answer to your inflation-influenced discounts, you might end up paying a premium price for your purchase.

How Deferred Interest Offers Work

When you sign up for a deferred interest credit card promotion, it means you won’t pay interest for a specific period, usually six to 12 months. If you pay off your entire balance during this period, you will not owe any interest on your purchase.

Getting away with paying no interest may seem like a good deal, but it’s not always the case. The lender will continue to accrue interest during this promotional period, and if you still carry even a portion of the balance at the end of this period, you will also be required to pay any interest that has accrued.

For example, if you purchase a laptop computer for $2,000 under a deferred interest promotion and you have paid off $1,900 at the end of the promotional period, you will still be liable for accrued interest on the amount you have already repaid. And you will continue to pay interest on the remaining $100 balance plus accrued interest.

A deferred interest promotion is different from a 0% Promotional Interest Card in that no retroactive interest accrues to the latter. At the end of your 0% promotion, you will only pay interest on the balance you owe. Interest will not apply retroactively.

The pitfalls of deferred interest

You may accept a promotional interest-free offer, assuming that you will repay the entire balance before the end of the “interest-free” promotional period. An offer could be “no interest if full payment is made within 12 months”. That’s a big “if” though, and that’s where the card issuer can cash in.

For example, with all the speculation about recession, what if you lose your job and can’t pay your balance before the promotion ends? Or, what if you have an unexpected car repair or medical bill that you need to prioritize instead?

If you read the fine print of the offer, you may find that the promotional offer ends if you miss a monthly payment. You will also not be able to avoid taking an interest in such situations. Your high interest rate might even increase in this case.

And if you have other balances, such as purchases or cash advances on your credit card, payments you make above your minimum payment may not be applied to your deferred interest balance.

The Credit Card Accountability and Disclosure Act states that when you make more than your required minimum monthly payment, the issuer must apply the excess amount to the balance with the higher interest rate.

This means, for example, that if you took out a cash advance with an extremely high interest rate, the issuer would apply that excess payment to the balance. There is a exception for deferred interest payments, but you will need to talk to your lender to benefit from it. When you do, mention that you want your overpayments to be applied to your deferred interest balance.

However, for the two billing periods before the end of the promotion, the law requires that your lender automatically apply your excess payments to the deferred interest balance, even if you do not specifically choose this option.

Tips to better manage your deferred interest promotion

Before embarking on a deferred interest promotion, make sure that you will be able to pay off the entire balance by the end of the promotional period. Calculate your monthly payment amount to repay the amount. Just making the minimum payment means you will still have a balance at the end of the transaction period.

If you have other balances, contact your card issuer and let them know that you want any overpayments above the minimum to be applied to your deferred interest balance.

You can also set up automatic payments from your bank account so you never miss a monthly payment. And be sure to read the fine print of your offer to know what to look out for.

What if, even with the best of intentions, you still find yourself stuck with a balance at the end of the transaction period? You would then be better served by finding other ways to better manage the balance.

For one, you can apply for a 0% interest balance transfer card and aim to pay off the balance during its promotional period. Another financing option includes taking out a Personal loan to settle the balance. Owners could also consider paying off the deferred interest balance with a home equity loan.

The bottom line

If you’re gearing up for the holiday season and looking for inflation-fighting deals, don’t jump on deferred interest promotions too quickly. You can avoid paying interest if you pay off the entire balance before the promotion ends, but there are pitfalls if you don’t. If you opt for such an offer and find that you have a balance at the end of the promotion, look for alternative financing to avoid high interest charges.

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