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No Payments for a Year? No Thanks!

Part of stretching our dollars this holiday means avoiding payment options that may be cheap now – but will cost you later.

The phrase ‘no payments for a year’ should make you worry, says John Ulzheimer. There are three big reasons to avoid ‘buy now, pay later’ situations. The first of which is something called stagnant debt.

Stagnant debt is essentially a balance that sits on your credit report for as long as it is until you have to pay for what you’ve bought – typically 18-24 months. That can do serious damage to your credit score, and it’s compounded if the credit card you made the purchase on is maxed out.

But the most infuriating part of the ‘buy now, pay later’ shopping experience is the third-party financing aspect, says Ulzheimer. In these cases, you aren’t making a deal with the retailer – you’re making a deal with an outside finance company. Unlike when you go to a bank and know what sort of account you’re opening, you don’t know who you’re opening an account with or what the terms are unless you read the fine print. This is a big deal, Ulzheimer says, because in the FICO credit scoring system you can lost points by having an account with a third-party financier because you tend to appear risky than you are in reality - that's because finance companies are attractive to high-risk, low-credit score consumers.

If you do end up starting an account with an outside financier, or you already have one, and you run into a problem making the payments when they come due, always contact the finance company directly and not the store. But do everything you can to not fall behind, as you can be hit with interest rates as high as 29% - just as bad as retail store credit cards, which areanother big ‘no, no’ to keep in mind at the mall these next couple weeks.