The Consumer Financial Protection Bureau wants you to avoid falling into the trap of promotional credit card offers.
Editor’s note: This is the first in a three-part series coming this week about things the Consumer Financial Protection Bureau is up to. Check back Tuesday and Wednesday for the other parts.
If you aren’t paying attention, you might not realize how much your credit card can rip you off.
That’s the warning from the Consumer Financial Protection Bureau, which wants you to know how to tell the difference between credit card offers. The CFPB is also encouraging credit card issuers to stop offering deferred interest cards, since consumers have a hard time understanding the difference between these options and zero percent interest cards. They work in a similar way for a promotional period, but one ends up being more expensive if you aren’t careful.
The CFPB was created in 2011 in response to the recession. Its mission is to help consumers make better financial choices and defend them against predatory companies charging unfair fees or otherwise manipulating them into overpaying. While credit card issuers aren’t breaking any laws with their different interest options, they aren’t exactly being helpful. The CFPB wants issuers to be clearer and consumers to be smarter when it comes to different offers.
First: the difference in these interest offers
Credit card companies can have some enticing offers to get you to sign up. Many times, retailers will have their own credit cards to encourage you to shop at their store more often — think Macy’s, Sears, TJ Maxx.
The major difference in zero percent interest versus deferred interest is whether you’re paying interest on the original amount. Zero percent interest means you are only paying interest on the amount starting after the promotional period ends, usually a year. Deferred interest can catch up with you after the promotional period.
Issuers get you to pay more this way because they assume you won’t pay off the balance after the promotional period. Many consumers don’t realize that a promotional offer has an expiration date, or forget when it is. If issuers aren’t clear up front what the terms are after the promotion, and consumers don’t mark it on their planners, they can be left paying a lot more than they expect.
The CFPB explains the difference like this: Say you buy a $400 TV with a store credit card. You pay $25 on time every month, but by the end of the one-year promotional offer, you still owe $100. If you had a zero-percent promotion, you’ll start paying interest on that $100. If you had the deferred interest promotion, you’d owe $165 after the one-year promotion. Would you rather pay $400 or $565 for a TV?
Deferred interest starts accruing right away, while zero percent doesn’t start until the promo period is over. It’s a tiny difference in wording that makes a world of difference in what you pay.
Next: how to protect yourself when signing up for these offers
If you aren’t sure what these offers entail, don’t sign up for them. But if you want to take advantage instead of being taken advantage of, here’s a basic rundown of what to remember…
Remember that a credit card is still borrowing money! Regardless of zero or deferred interest options, you’re still being lent money to pay for goods or services. If you don’t have cash to cover every dollar you put on the card, you should think twice about any purchase.
Borrowing money means that at some point, you will have to pay it back — and then some. Companies may lure you in with specials, but those offers do have an expiration date. Do your best to pay off your original balance before the promotional offer ends. Otherwise, you’ll be paying more money than you borrowed, which could load you up with unnecessary debt. The hill keeps getting steeper. But if you can always cover your balance, these offers can work for you.
Your credit history and score matter. Once that promotional offer ends, the amount of interest you start to accrue is based on your credit score. The better the score, the lower the interest rate. If you know you can’t pay off the whole amount after the promo period, having a higher credit score will minimize the damage.
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Article last modified on June 27, 2017. Published by Debt.com, LLC .