People sign up for them without knowing what they are and pay for it later.
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If you aren’t paying attention, you might not realize how much your credit card can rip you off.
When you get a store credit card, you’re probably signing up for deferred interest. This type of credit card offer is so convoluted that even the Consumer Financial Protection Bureau (CFPB) has asked businesses to stop offering it.
“With its back-end pricing, deferred interest can make the potential costs to consumers more confusing and less transparent,” says CFPB director Richard Cordray. “We encourage companies to consider more straightforward credit promotions that are less risky for consumers.”
If you blindly sign up for this card, chances are you’ll end up paying a lot more than you expect. Here’s everything you need to know about deferred interest, so you can protect yourself.
What is deferred interest?
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 (though they can come from any credit card issuer).
These stores actually bank on ignorant customers not understanding the terms of card offers like deferred interest. It works like this: you make a purchase on your deferred interest card, and interest starts accruing immediately. But you don’t have to pay anything until the end of a promotional period, which is usually six months to a year.
Issuers get you to pay more because they assume you won’t pay off the balance before the promotional period is up.
The CFPB explains it like this: Say you buy a $400 TV with a store credit card. You pay $25 on time each month, but by the end of the one-year period, you still owe $100. With a deferred interest card, interest would be adding up throughout the year, and place an extra $65 on top of the amount you still owe.
Deferred interest vs. zero percent interest
Another promotion issuers offer is a zero percent interest credit card. Deferred interest and zero interest are very similar, and a lot of customers get them confused.
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 means you’re paying interest on the original amount.
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.
Running with the same $400 TV example, with zero interest, if you paid $25 every month, but still owe $100 at the end of the promotional period, that’s all you’d owe. Interest would start accruing on that amount instead of the original $400, like it would with deferred interest.
How to not get duped by deferred interest
The CFPB study says more than one-third of consumers end up paying more than 150 percent of the original full amount due to deferred interest charges.
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 consider…
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 the cash to cover every dollar you put on the card, you should think twice about any purchase.
Also, make sure you know the interest rate after the promotional period ends, so you know how much you’ll owe if you don’t pay it off in full.
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. Know when that is and 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.
How to pay off deferred interest charges quickly
If you still have a balance on your deferred interest card and it’s passed your promotional period, you need to focus on paying that balance down as quickly as possible. Here’s how to get serious about paying down that debt:
1. Set up a budget
The first step in paying down your debt is figuring out how much you owe, and how much you can put toward that amount. Calculate your monthly expenses and determine your “needs” and “wants.” Cut out as much of the wants as possible, use that extra money to pay your credit card balance.
Budgeting doesn’t have to be hard! Start using a budgeting tool that automatically updates Google Sheets and Excel with your bank, credit cards and other transactions.
2. Set milestones to keep yourself motivated
Setting goals may sound cheesy, but it works to motivate yourself when you see your debt dropping. Make a plan for the amount you’ll pay down in a certain amount of time — and stick to it.
3. Get in touch with a credit counselor
If you’ve tried to pay off your deferred interest credit card balance, but can’t make it work, it may be time to consult a professional. They’ll help set a plan with you to pay back your debt through tools like consolidation or a debt management program.
For more information on how to set up a free evaluation, read Debt.com’s in-depth report on credit counseling.
Published by Debt.com, LLC