Understanding Deferred Interest: Avoiding Financial Pitfalls

Looking to spruce up your home this spring? Be wary of using a credit card that offers deferred interest to make your purchase. It may seem like a smart way to finance a large purchase like a new couch or appliance, but it could cost you more in the long run.
 
According to a recent WalletHub survey, 82% of people don’t know how deferred interest works. As with any credit product, deferred interest credit cards should be used carefully or you could end up paying more for your debt.
 
Interested in learning more about deferred interest? Check out these informative tips from our partner, KOFE (Knowledge of Financial Education).
 
 What is deferred interest?
Deferred interest credit cards offer a special promotion where you pay no interest for a
short time (usually 6-12 months). However, this is not the same as a 0% APR introductory period on a regular credit card. The difference is that with deferred interest, you pay retroactive interest charges at the end of the promotion period.
 
Basically, with deferred interest you want to pay everything off before the end of the promotion. Otherwise, you get popped with high finance charges that you didn’t expect. Even if you paid off 99% of the balance, if that 1% is left when the promotion period expires, you pay interest charges on 100% of the original debt owed.
 
What does deferred interest mean for my debt?
Let’s say you buy furniture for $3,000 with a 0% APR promotional rate that lasts for 12 months. You pay off $2,500 within that year.

• If you use a regular credit card that offers 0% APR introductory, then you pay interest charges on $500. In other words, interest only applies to the remaining balance.
• However, if you use a retail store card with a 0% APR promotion and deferred interest, then after one year you’d face interest charges on the full $3,000 balance.

 Current retail credit card interest rates are over 21% APR. On the card without deferred interest charges, you’d pay just over $15 in total interest charges if you kept up the same payments you made during the promotion period. However, on the card with deferred interest charges, total interest would be over $2,000.
Your total cost would be over $5,000.
 
These promotions can sound great at checkout; but you need cash flow in your budget to pay off the debt in-full before the promotion ends.
 
What are some ways to avoid deferred interest?

• Know when your deferred interest period ends. Use the date (it can be found on your statement or by calling customer service) to figure out how much you will need to pay each month to have your balance paid in full before the interest kicks in.
• Always pay more than the minimum payment due. It is likely that the minimum payment owed will not be enough to pay your balance in full by the end of the promotional period.
• Always pay on time. A missed payment could end your deferred interest rate early, incur penalties or increase your already high-interest rate.
• Only charge what you can afford to pay off during the zero percent interest period. Ideally, knowing what you can afford monthly before making a big purchase will help you stay within your budget.

 What to do if you run into trouble with deferred interest
charges

• Balance transfer credit cards offer 0% APR (not deferred) for an introductory period. You would transfer the balance for a small fee to the new card. This would reset your promotion APR clock so you have more time to pay off the debt interest-free.
• Personal debt consolidation loans don’t offer 0% APR, but they generally have APR
  of less than 10%. If it will take more time than a promotion period to repay what
  you owe, consider a consolidation loan.
• Debt management programs offer a path for people to consolidate even when they
  have high volumes of debt or low credit scores. A credit counseling agency helps
  you find a payment that works for your budget. Under an agreement, they may negotiate with your creditors to reduce or eliminate interest charges.

 Not sure which option is right for you? A financial coach can help you evaluate all
options available to find the right solution for your unique financial situation.
 
7 17 has partnered with KOFE to provide free financial education tools to help support members’ long-term financial health. Resources include publications, videos and more. Plus, you have free access to financial coaches, seven days a week! For more tips and information visit, www.717cu.com/KOFE.