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

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.