Beware This Common Retail Credit Card Promotion

If you do much of any spending, you’ve surely received the pitch or seen it in an ad or commercial: You pay no interest for the first six months, one year or maybe even two years.

This type of promotion, technically known as a deferred interest, is often offered by store credit cards. But the federal government is crying foul.

The Consumer Finance Protection Bureau, or CFPB, recently issued letters to top retail credit card companies about the practice of deferred-interest financing. The CFPB says the practice tends to cost shoppers more money in interest payments than they realized when they signed up.

The letter explains:

“The costs of deferred-interest financing are typically less transparent because when they are incurred it is not until the end of the promotional period. While deferred-interest offers are marketed to the public as charging no interest for the promotional period, interest actually starts accruing from the date of purchase and will be added back on top of the remaining principal balance if the promotional balance is not paid in full by the deadline at the end of the promotional period.”

The interest rate on deferred-interest offers is generally around 25 percent once the promotional period ends, according to the CFPB. So the amount of interest a shopper owes on any balance remaining after the promotional period can be significant — sometimes amounting to more than the remaining balance itself.

The CFPB also notes that its letter comes a month after one of the nation’s largest retailers — which the CFPB did not name — announced it would offer zero-percent-interest promotions instead of deferred-interest promotions on its store credit card. The CFPB encouraged letter recipients to do the same, as the costs involved in a zero-percent-interest promotion are more transparent for consumers.

The federal agency also advises consumers who are considering a retail credit card with a deferred-interest promotion to first be sure they know:

• The length of the promotional period.
• What the interest rate will be when the promotional period ends.
• What size payment they must make each month to ensure a purchase is paid off before the promotional period ends.

Find a great credit card

Despite their cons, store credit cards have noteworthy pros, too. We detail both in “Should You Get a Store Credit Card? It’s Tempting,” which concludes:

“If you there’s a store you shop at regularly and a card gets you an extra discount, it may make sense [to get a store credit card]. … Still, you might want to check out the other credit cards on the market to see if you can find one that offers better rewards with a lower interest rate.”

Check out the Money Talks News credit card search tool to find out about currently available credit cards and what they offer in terms of rewards, interest rates and other important factors.

What has your experience with store credit cards been? Sound off below or on our Facebook page.