Zero interest-rate financing. Store cards with discounts. Cash advances.
As consumers gear up for the holiday spend-a-thon, they will have plenty of opportunities to get into trouble with credit cards. And if they're not careful, they can find themselves with lower credit scores, high interest payments and more.
Holiday spending is expected to increase nearly 5 percent this year, with the average consumer planning to spend $804, according to the National Retail Federation. And a new survey commissioned by Discover finds about 40 percent of consumers plan to use credit cards for most of their holiday shopping. That can make credit card deals look particularly enticing—and card issuers are ramping up their offerings.
Deferred interest credit card offers, for example, often surface this time of year, according to Gerri Detweiler, director of consumer education for Credit.com. These offers, often announced as "zero percent interest" or "special financing" promotions, typically give consumers a grace period on interest, sometimes for a year or more.
For a consumer making a big purchase and planning to pay it off within that time, deferred interest plans can be helpful, Detweiler said. But she warned that consumers who leave even a single dollar of charges on the card by the time the deferred interest period is over can be hit with retroactive interest charges on the entire balance they charged.
She had just received a letter from Home Depot, for example, explaining that if she took its deferred interest offer and did not pay it off in full within the specified period, she would be charged interest on all her charges retroactively at a rate of 22.9 percent. (The store's website describes a six-month deferred interest offer with interest rates on unpaid balances ranging from 17.99 to 26.99 percent.)
According to CardHub, a credit card comparison website, paying off your credit card debt one month behind schedule or missing a single payment could increase your financing costs by more than 27 times if you rack up charges under a deferred interest plan. The site has compiled a list of retailers offering deferred interest plans with varying degrees of transparency.
Regulators are keeping an eye on deferred interest offers as well. The Consumer Financial Protection Bureau in September issued a bulletin warning credit card issuers against "engaging in deceptive and/or abusive acts and practices in connection with solicitations that offer a promotional annual percentage rate (APR) on a particular transaction over a defined period of time."