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Deferred-interest Credit Cards – Too Good To Be True?

Big risks possible with ‘deferred interest’ credit cards

The next time you’re offered a “great deal” on a credit card that puts off interest payments until months or years later, it might be best to just walk away.

Popular at mall shops, appliance and furniture stores and big box retailers, these deferred interest credit cards delay interest charges until some point in the future.

But, in a recent report, WalletHub said these cards that offer claimed benefits such as “no interest if paid in full” or “special financing” are “particularly dangerous.”

“Deferred-interest financing is like a wolf in a sheep’s clothing, pairing an enticing offer … with a clause that allows the deal to turn ugly if you make the slightest mistake,” the report says.

WalletHub isn’t the only one to raise alarms. The Consumer Union, the policy and advocacy arm of Consumer Reports, has called for a ban of these kinds of credit cards, calling them “dangerous traps.”

So, what’s the rub?

The problem is that if you don’t pay off the entire credit card bill before the interest rate kicks in on a deferred credit card, then you must pay interest on the entire amount of that original bill -- regardless of how much you paid off already.

A 2015 report from the National Consumer Law Center shared this scenario: If you purchased a living room set for $2,500 on Jan. 2, 2016 using a one-year 24 percent interest plan, then pay off all but $100 by Jan. 2, 2017, you will be “retroactively charged” nearly $400 interest on the entire $2,500 bill.

The National Consumer Law Center report found that the card offers are complex and deceptive, making it difficult for consumers to understand the full impact if they signed up. They come with high annual percentage rates -- 24 percent is the average, about twice as much as the APR for a typical card.

And they often impact the most vulnerable, the report said. According to a study by the Consumer Financial Protection Bureau, a government agency, for consumers with subprime credit scores, typically below 640, more than 40 percent couldn’t pay off the balance before the interest rates kicked in.

The center, a nonprofit that focuses on consumer issues, also called for regulators to outlaw the cards.

“These promotions are inherently unfair as their profits depend on trapping consumers either by confusion or because the consumer cannot pay due to financial problems, thus imposing a huge lump sum retroactive interest charge on those least able to handle it,” the National Consumer Law Center’s study said. “The simplest, most effective, and best step that the Consumer Financial Protection Bureau could take to protect consumers from the trap of deferred interest is to ban these promotions.”

So, the next time you’re offered a “great deal” on a credit card as you check out at a store, take a very close look at the so-called deal. Are you sure you could pay off that entire bill within the time required? Or, could it be a trap to even bigger bills down the road.

After all, the unexpected can always happen. A job loss, a major medical emergency or an expensive car repair can set back even the best of intentions. It might be best to just leave that offer on the table.

The team at CESI is committed to helping you make wise financial decisions and to helping you understand how to get out, and stay out of debt.  For a free debt analysis, contact us and find out how we can help.

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