Since many Americans need help financing their holiday shopping, a lot of retailers offer store-branded credit cards with deferred interest rates. That means you can carry a balance on them without having to pay interest for a set amount of time.
But while these cards can indeed help you afford an expensive purchase, they can also end up costing you more than you may realize because of the way the interest rate functions once it kicks in.
A recent WalletHub survey found that, while 85 percent of store credit cards that have 0 percent annual percentage rate introductory offers have deferred interest, 82 percent of Americans don't understand how deferred interest works.
Here's the deal: You make a purchase on a card with an introductory offer of 0 percent APR for a set number of months. If you're able to pay off the loan consistently and in full within that introductory period, you won't have to pay any interest. If, on the other hand, you miss a payment one month or can't pay off the card in full, you get slammed with interest charges — and not just on however much of your unpaid balance remains. The introductory offer essentially vanishes, and you owe interest as though a regular APR were in effect the whole time.
Let's say you make a $1,000 purchase on a card with an APR of 25 percent that is deferred for one year. If, at the end of the year, you've only paid off $950, you owe not 25 percent of your remaining balance of $50, or $12.50, but 25 percent of the total $1,000, or $250. That's a significant difference.
"Deferred-interest financing is like a wolf in a sheep's clothing," WalletHub reports. "Since many retailers don't disclose deferred interest clearly enough, it can lead to some expensive post-holiday shopping season surprises."
"If you see 'no interest' and 'if paid in full' in the same sentence, that should be a red flag," says Brian Karimzad, a researcher at CompareCards.com. That wording would indicate that the card's zero-interest period is conditional, not guaranteed.
According to WalletHub's survey, of those who understand the concept, 79 percent think deferred interest is unfair and 62 percent think it should be illegal.
If you don't fully understand deferred interest, you might think your store card will function like a balance-transfer credit card, which lets you only pay interest on the balance that remains after a no-interest introductory period, not the entire original amount. In fact, a balance-transfer card may be a better option for you if you expect to have to take on some debt to buy gifts this holiday season.
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