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.