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“Would you like to apply for a store credit card today? You can get [insert number here] months free financing.”
We’ve all heard it before when checking out at a retail store. Chances are, you’ll be hearing it a lot more over the holidays as you ramp up your holiday shopping.
It can be tempting — you can make a large purchase today, and pay it off over time interest-free. Some companies will even throw in a gift card or a discount if you apply for their credit card. But before you say “yes” to the cashier, there’s one hidden trick that these companies often use. If you’re not aware of it, your “free financing” might end up backfiring in a big way. (See also: Should You Sign Up for That Store Credit Card?)
What is a “deferred interest” credit card?
There are two types of credit cards that offer free financing: 0% Intro APR cards, and deferred interest cards.
You see ads for 0% APR cards all the time — you get 0% APR for a limited time. After that, the standard interest rate goes into effect. When stores offer a “deferred interest credit card” you might reasonably assume they work the same way. But they are very different.
With a deferred interest card, you must pay off the charge in full before the promotional free financing period is over. If you don’t, you’ll have to pay the full amount of interest charges, as if that interest rate was in effect the whole time. All that “deferred” interest comes rolling back the moment the promotional period is over, not just on the balance you have left, but on the entire purchase amount.
And it’ll be a heck of a bill too: the interest rates on these types of credit cards are often sky-high, running upward of 25% APR. As a comparison, the current average interest rate for all credit cards combined is 13.08% APR, according to the Federal Reserve.
Let’s look at an example of how much a deferred interest credit card might cost you. A store credit card offers 12 months deferred interest financing, with a standard 27.99% APR. If you make a $1,500 purchase and only make the minimum payments during those 12 months (about $45), you’ll owe a walloping $321.63 in interest at the end of it — and still owe over $950 on your purchase.
How do you spot a deferred interest credit card?
Your first clue is who is offering the card. Most…
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