The holiday season is almost here, which means retailers are ready — not just with sparkly merchandise and doorbuster deals, but also with a certain kind of credit card offer.
These offers, promising no interest payments for months or even years, can be enticing, especially for shoppers making big ticket purchases for the holidays, and retailers are busily rolling them out.
"Deferred interest programs are a popular choice for consumers who need to purchase expensive items like refrigerators and dishwashers but don't have the money or savings," said Nessa Feddis of the American Bankers Association. "They allow them to make the purchase when they need to and spread the payments over time without having to pay any interest. The overwhelming majority repay within the deferred interest period and benefit from a free loan."
But as with many promising deals, there is a catch. A single late payment or a failure to pay a balance by a certain deadline can trigger sizable financial penalties.
"These offers are traps for the unwary," said Chi Chi Wu, a staff attorney at the National Consumer Law Center. The terms are "confusing to the point of, we think, being a trap."
The downside of a deferred interest plan is that the interest does not, in fact, disappear unless consumers pay off their initial purchase by the time the deferral ends. If a balance remains, consumers will owe full interest from the purchase date on the original purchase amount.
Issuers of deferred interest cards and financing, like Macy's, say they offer a useful option to consumers. "Macy's offers deferred interest programs so our customers have the ability to make large purchases and spread the payments across a pre-determined deferral period," said Jim Sluzewski, a spokesman for Macy's. "This allows a customer to make the required minimum monthly payments (rather than a large outlay up front) and avoid any assessment of interest if the consumer pays off the account in full within the deferral timeframe."
Sluzewski also said the interest rate on the Macy's deferred interest programs is the same rate as for a regular account, but some deferred interest cards and plans charge higher rates than those on many credit cards.
Amazon, for example, offers six months of interest deferral on some purchases with fairly typical terms. Users will pay no interest if the balance is paid within six months, but those who do not pay the balance in full will owe interest from the purchase date. In addition, the annual APR is 25.99 percent.
Others charge even higher rates. Dell, for example, has a 12-month deferred interest financing plan on certain products where interest is charged from the purchase date if a balance remains at the end of the deferral period. The rate can be as high as 29.99 percent.
"Dell offers customers a range of interest rates, like all businesses, that vary based on the credit history of the individual. We also provide a significant amount of credit choice and information on our website to let our customers know how they can lower their interest rates or eliminate them," said David Frink, a Dell spokesman.
Consumers may believe when they take out these cards that they will pay off their balance in the time allotted, but that is not always the case, said Wu. Retailers issuing deferred interest cards "prey on this tendency in human beings to be optimistic about these things," she said, but "life happens."
She also pointed to another issue with deferred interest cards: payment application, or how retailers allocate the payments people make. For example, say a customer buys a $1,000 television on Jan. 1 with a card offering 12 months of deferred interest. Then, three months later, the consumer uses the card to buy a $500 pair of speakers. When the consumer makes payments, the retailer may not apply that payment to the original purchase unless the consumer asks.
"You can direct them, but that is something you will have to request," said Jill Gonzalez, an analyst at WalletHub.
The complexity of the cards' terms is such that CardHub, a sister website of WalletHub, has taken to publishing annual measures of the transparency of different retailers' deferred interest card offers. In its latest survey, CardHub found that while terms have become somewhat more transparent over the last few years, overall, the offers rated a 7.8 on a scale of 1 to 10.
According to rules and regulations enacted since the financial crisis, "any retailer offering deferred interest plans has to say the interest will be assessed from the purchase date. They have to have the APR in there," said Gonzalez. "But there is no stipulation on where or how that is told to the consumer."
For example, until recently, Apple had that information on the last page of its card agreement, Gonzalez said, though its website now makes the information more readily available. Apple declined to comment.
Consumers standing in a long line on Black Friday may feel pressure to sign up for a deferred interest deal without reading the fine print, but Gonzalez said there are other viable options.
She said many credit cards without deferred interest are offering extended zero-interest introductory periods. And for consumers determined to take out a store credit card, many retailers' standard cards offer a so-called first purchase discount. For example, Macy's offers a 20 percent discount on the purchases made the day a card is approved and the following day.
The National Retail Federation expects holiday sales this year to be 3.7 percent higher than 2014, and more than a third of the shoppers surveyed plan to use their credit cards to do their shopping. Deferred interest cards may look like a great way to keep down the final tally, but for consumers who are not careful, the reality down the road may be very different.