Holiday Shopping? Watch Out for This Costly Credit Card Trap

As the holiday season gets into full swing, so too do the credit
card promotions from retail stores far and wide.

This is prime season for enticing shoppers to sign onto the
dotted line for cards that offer a discount on your first purchase
or a special 0% introductory APR — which to many cash-strapped
consumers can sound like an ideal way to finance a holiday
extravaganza.

The reality of these deferred-interest retail credit cards
however, is that they may not be as helpful as they sound at first
blush. In fact, in many cases, signing on for one can cost far more
than expected if you’re not clear on how the deferred interest
proposition works.

A recent study
from WalletHub revealed as much. It found that 82% of people do not
understand deferred interest. Perhaps even more telling, 62% of
people surveyed think deferred interest should be illegal.

Why such strong sentiment about outlawing the practice? Maybe
it’s because those who are clear about its pitfalls realize what
a trap deferred interest can be.

Why Deferred Interest Cards Can Be a Dangerous Trap

As the WalletHub study explains, deferred interest offers
typically mean that you pay no interest or a reduced rate for a
period of time — but the setup allows for the possibility that a
high, regular APR can retroactively be applied to your entire
original purchase amount, compounded for months, as if the low
introductory rate never existed.

Let’s state that again, just to be clear: Despite the 0% APR
introductory offer, a much higher interest rate can be applied to
your entire original purchase amount.

How can that happen? Paying one monthly bill late or owing even
$1 when the promotional period expires can trigger that nasty
deferred interest clause, which in turn activates high interest
charges.

“Deferred interest is common with 0% store financing offers.
And since many retailers don’t disclose deferred interest clearly
enough, it can lead to some expensive post-holiday shopping season
surprises,” writes Alina Comoreanu, senior researcher at
WalletHub.

With that in mind, here are some tips and best practices when it
comes to fielding the deferred interest offers that will likely be
coming your way this holiday season.

The Best and Worst Deferred Interest Offers

The WalletHub study found that many retailers don’t offer
deferred interest cards at all, including Target, Costco, Barnes
& Noble, Kohl’s, and Ann Taylor, plus many others. But among
the retailers that do tempt customers with deferred interest
offers, some are more transparent than others. So if you must sign
up for one of these cards, keep the following information in
mind.

Pottery Barn and West Elm were the least transparent retailers
when it comes to making clear to consumers how their deferred
interest programs work. This is the third consecutive year these
three retailers have topped the “naughty” list, while Zales
joined their ranks this year.

Each of these retailers scored a zero in every single
transparency category reviewed by WalletHub. The categories
surveyed covered such things as how prominently a retailer posted
information on its website about how interest is assessed from
purchase date, the readability of that information, and the
readability and location on the website of the credit card’s
regular APR.

Retailers that did the best in each of these categories included
Apple, Home Depot, Lowe’s, JCPenney, and Staples, among
others.

Tips for Using a Deferred Interest Credit Card

If you’ve decided to take the risk and sign up for a deferred
interest credit card, do yourself a favor and make note of a few
best practices that can help see you through the experience more
successfully.

Howard Dvorkin, a CPA and chairman of Debt.com, recommends creating an alert
on your phone to remind you of when the introductory period
ends.

“Here’s something I can almost guarantee: Anyone who has a
store credit card also has a smartphone. And that smartphone has a
calendar. And that calendar has alerts,” said Dvorkin. “So, set
an alert for the end of the introductory offer and make sure to pay
the thing off.”

Failing to pay off the entire balance before the intro period
ends wipes out any savings you may have realized by signing up for
the card in the first place, notes Dvorkin. “You’ll pay double
or even triple those savings in your first month after the
introductory offer expires,” he added.

Since even one late payment can trigger the higher APR, it’s
smart to set monthly due-date reminders or automate your payments
as well. And you should plan to pay more than the minimum payment
required each month — enough to eliminate the balance entirely
before the intro rate expires.

Finally, it’s important to understand your own behavior and
habits, advises David Gafford of Shift Processing, a credit card
processing company.

“I think the best people can do is really understand what type
of person they are. If they don’t want to read the details or the
fine print, then this type of credit card may not be for them,”
he explained. “Because if they don’t understand what they’re
getting into, they’ll be up a creek fast. These cards are very
unforgiving.”

Better Ways to Finance Your Holiday Spending

Here’s a scenario that illustrates why you might want to
consider safer options for financing your holiday spending.

Suppose you open a new credit card to finance a couple of
big-ticket items from your Christmas list. And those items end up
costing $1,000, an amount you plan to repay during the card’s
12-month, zero-interest introductory period.

But life happens to all of us, and unexpected expenses occur —
especially around the hectic holidays. So, let’s say it takes you
13 months to pay back that $1,000, making payments of $77 a
month.

If you had a normal 0% credit card (such as
a good balance transfer card
), you’d only pay about $1 and
change in interest for that extra month’s balance, assuming
an
average 17% APR 
— because the higher interest rate would
only apply to the balance remaining at the end of the 12-month
introductory period. No biggie.

On a deferred interest credit card, however, you’d end up
paying roughly 100 times more in interest — over $100 — because
once Month 13 hits, the ordinary 17% APR would be applied
retroactively to each month’s balance over the last year. As the

Consumer Financial Protection Bureau notes
, “If you don’t
pay the entire balance off in 12 months, or if you are more than 60
days late in making a minimum payment, you will be charged interest
for each month on the balance you owed in each of the 12 months.”
Here’s what that would look like:

Balance Retroactive Interest Owed
Month 1 $1,000 $14.17
Month 2 $923 $13.57
Month 3 $846 $12.43
Month 4 $769 $11.30
Month 5 $692 $10.17
Month 6 $615 $9.04
Month 7 $538 $7.91
Month 8 $461 $6.78
Month 9 $384 $5.64
Month 10 $307 $4.51
Month 11 $230 $3.38
Month 12 $153 $2.25
Month 13 $76 $1.12
Total: $102.27

Is it any wonder so many people think these cards ought to be
illegal?

“Fortunately, there are better financing alternatives, in the
form of regular 0% APR credit cards,” said WalletHub analyst Jill
Gonzalez. “This means that you pay no interest on purchases for a
certain number of months after opening the account. After the
interest-free period ends, the card’s regular APR applies only to
the remaining balance.”

Better yet, pay cash for your purchases, says Dvorkin, who
advises sticking to a strict budget for the holidays.

“People must focus on what’s important. If they really
can’t afford presents, then consider
offering personal services as gifts
such as dog walking,
cleaning the house, or washing someone’s car,” he said.

“At end of the day people need to be very, very careful,”
Dvorkin added. “When you go into these stores during the
holidays, keep your head about you. Everything looks good.
There’s tinsel everywhere. They’re playing the holiday music,
they’re getting you into the holiday spirit and you kind of lose
your senses, and when you go to check out, you’re pitched this
credit card.”

Don’t get sucked in, Dvorkin said. “The best thing to do is
make a list of who you want to buy presents for, what you want to
buy, and what you want to spend, and that’s it. Nothing
more.”

Mia Taylor is an
award-winning journalist with more than two decades of experience.
She has worked for some of the nation’s best-known news
organizations, including the Atlanta Journal-Constitution and the
San Diego Union-Tribune. 

More by Mia
Taylor
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Holiday Shopping? Watch Out for This Costly Credit Card Trap

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Holiday Shopping? Watch Out for This Costly Credit Card Trap