Fall Into This Credit Card Trap, and You’ll Pay 27 Times More Interest

online shopping
Photo by wong yu liang / Shutterstock.com

Retail credit cards can really save you some money this time of year, helping to counteract the ballooning effect that holiday gifts might have on your spending. That is, if you use retail credit cards smartly.

Make a common misstep, and you could end up paying 27.5 times more interest on purchases you make with a retail credit card, according to WalletHub’s recent analysis of 73 large retailers’ financing options.

The trouble stems from deferred interest. As WalletHub defines it:

“Deferred interest is when a retailer advertises a low introductory APR — often 0 percent — and gives a consumer the chance to pay for their purchases without interest, only to slam them with interest charges (as if the regular APR had been in place from the start) if they are unable to do so.”

The trouble with deferred interest

The analysis found that 85 percent of store credit cards with a zero percent introductory annual percentage rate (APR) have deferred interest. Additionally, 64 percent of consumers cite zero percent financing as the top draw of retail credit cards — making it a far bigger draw than getting a discount on the first purchase you make with a store credit card.

At the same time, 82 percent of folks don’t know how deferred interest works, and “many retailers don’t disclose deferred interest clearly enough,” the analysis states.

This combination of factors can lead to consumers effectively paying a lot more than they intended for items they purchase with a retail credit card.

Here’s an example from the analysis: Say you put $800 on a credit card with 0 percent financing because you believe you can pay off that amount within six months, which would enable you to avoid any interest charges. But in reality, you end up taking seven months to pay it off.

If that card were a standard credit card with a 0 percent APR, you would pay around $2 in interest because you would only owe interest on the portion of the $800 that you had not paid off after the six months had elapsed. But if that card were a retail credit card with deferred interest, you would pay $55 in interest — 27.5 times more interest — because you would owe interest on the entire $800, not just the portion remaining after six months.

Kelly Goldsmith, an associate professor of marketing at Vanderbilt University, tells WalletHub:

“Marketers and retailers are always trying to make money. Some will exploit consumers’ weaknesses and vulnerabilities in order to do so. … But there is good news for consumers! The internet age has made it easier than ever before for consumers to educate themselves about the various costs and benefits associated with promotional offers, like deferred interest financing.”

Avoiding getting surprised by deferred interest

It is possible to take advantage of zero percent financing offers without losing money to deferred interest. Just consider the following precautions:

  1. Do your homework: This is easier with standard credit cards: You can do one-stop comparison shopping by using a free online resource like Money Talks News’ credit card search tool. But with a store credit card, you might have to poke around the retailer’s or card issuer’s webpage to find key information, like the deferred interest APR or the length of time for which the zero percent financing will last.
  2. Make sure you can pay off the balance in time: If you do so before the zero percent financing period ends, you will avoid any interest charges, including deferred interest. Even better: Pay off the balance in full each month. That way, you won’t have to worry about keeping track of the financing period deadline or incurring hefty interest charges thereafter.
  3. Get a zero percent credit card on a major network: WalletHub reports that cards on the Mastercard, American Express or Discover networks will not have deferred interest.

To learn more about the pros and cons of retail cards, check out “Should You Get a Store Credit Card? It’s Tempting.”

What’s your experience with retail credit cards? Share it with us by commenting below or over on our Facebook page.

Disclosure: The information you read here is always objective. However, we sometimes receive compensation when you click links within our stories.

Read Next
14 Things We Buy and Then Almost Never Use
14 Things We Buy and Then Almost Never Use

Save your money. These items seem alluring, but they often end up as coat racks and dust magnets.

7 Things You Should Buy at Estate Sales
7 Things You Should Buy at Estate Sales

Here’s what an experienced estate sale shopper considers a great find.

Not Asking About This in the Hospital Can Cost You Thousands
Not Asking About This in the Hospital Can Cost You Thousands

Medicare recipients who fail to clarify their hospital status can pay a high price.

15 Purchases That Make Life Easier As You Age
15 Purchases That Make Life Easier As You Age

There are many products that can make getting older — or any time of life — a little easier.

10 Clever Ways to Make Extra Money
10 Clever Ways to Make Extra Money

Looking for additional cash? Here are a bunch of options that are accessible to anyone with internet access.

View this page without ads

Help us produce more money-saving articles and videos by subscribing to a membership.

Get Started

Most Popular
10 Things Frugal People Never Buy
10 Things Frugal People Never Buy

If you’re a true tightwad, the mere thought of spending money on these items gives you the willies.

10 Useless Purchases You Need to Stop Making
10 Useless Purchases You Need to Stop Making

You might as well flush your money down the loo if you spend it on these things.

7 Social Security Rules Everyone Should Know by Now
7 Social Security Rules Everyone Should Know by Now

Confusion over Social Security is a shame, considering how many of us will need this money badly.

Why Your Next Stimulus Check Might Be Bigger Than You Expect
Why Your Next Stimulus Check Might Be Bigger Than You Expect

Your third coronavirus payment will be the biggest yet — and possibly even bigger than you realize.

9 Shopping Mistakes to Avoid at Costco
9 Shopping Mistakes to Avoid at Costco

Are you missing out on serious savings at your favorite warehouse club?

If You Find This Thrift Shopping, Buy It
If You Find This Thrift Shopping, Buy It

They don’t make coffee makers like this anymore.

The 16 Cars Most Likely to Last 200,000 Miles
The 16 Cars Most Likely to Last 200,000 Miles

One automaker takes half the spots on a list of the longest-lasting vehicles.

14 Things You Should Stop Buying in 2021
14 Things You Should Stop Buying in 2021

These convenient household products come with hidden costs that you might not have considered.

3 Ways to Get Microsoft Office for Free
3 Ways to Get Microsoft Office for Free

With a little ingenuity, you can cut Office costs to zero.

Is Writing a Check Still Safe?
Is Writing a Check Still Safe?

Every time you pay by check, you hand your bank account numbers to a stranger.

6 Ways to Protect Your Retirement Accounts From Hackers
6 Ways to Protect Your Retirement Accounts From Hackers

Imagine having $245,000 stolen from your retirement account — and not being reimbursed.

8 Things You Should Replace to Improve Your Life Today
8 Things You Should Replace to Improve Your Life Today

Being frugal isn’t smart if you put off replacing these items.

This Is the Most Dependable Car Brand in the U.S.
This Is the Most Dependable Car Brand in the U.S.

This brand’s vehicles are least likely to give drivers repair headaches, according to J.D. Power.

7 Social Security Benefits You May Be Overlooking
7 Social Security Benefits You May Be Overlooking

There’s more to Social Security than retirement benefits.

13 Amazon Purchases We Are Loving Right Now
13 Amazon Purchases We Are Loving Right Now

These practical products make everyday life a little easier.

7 Hidden Sections of Amazon Every Shopper Should Know
7 Hidden Sections of Amazon Every Shopper Should Know

These little-known departments of Amazon are gold mines for deal-seekers and impulse shoppers alike.

7 Income Tax Breaks That Retirees Often Overlook
7 Income Tax Breaks That Retirees Often Overlook

Did you realize all these tax credits and deductions exist — or that they apply to retirees?

The 6 Best Investing Apps for Beginners
The 6 Best Investing Apps for Beginners

If you’re looking to ease into investing in the coronavirus economy with just a little money, check out these easy-to-use tools.

7 Kirkland Signature Items to Avoid at Costco
7 Kirkland Signature Items to Avoid at Costco

Even if it seems you save a bundle buying Costco’s Kirkland Signature brand products, they may not be the bargain they appear to be.

View More Articles

View this page without ads

Help us produce more money-saving articles and videos by subscribing to a membership.

Get Started

Add a Comment

Our Policy: We welcome relevant and respectful comments in order to foster healthy and informative discussions. All other comments may be removed. Comments with links are automatically held for moderation.