While the CARD Act for the new credit card rules goes into effect today, there's still one type of credit plan that consumer watchdog groups warn could trick Americans into paying much more than they bargained for: the interest-free financing offers dangled by retailers of everything from stereos to sofas.
The catch, says Chi Chi Wu, a staff attorney for the National Consumer Law Center (NCLC), is that these deals aren't really free. They're interest-deferred, and that makes a big difference. WalletPop interviewed Wu to find out what the deal is with these financing plans and why they can be a trap.
Say you purchase a TV from a store that offers no-interest financing for six months. If you pay off the full purchase price of the TV within six months, you're home free.
But if you owe even a penny of the original purchase price at the end of that six months, you'll have to pay what's likely to be a very high rate of interest on the entire purchase price times six months. In other words, the amount you'll be paying in interest at the end of the promotional term is the amount you would have paid if you hadn't put a penny toward that TV since the day you brought it home.
"This big retroactive wallop of accumulated interest is the problem," Wu says. While plenty of people understand how these plans works, many don't, she adds. What's more, some people enter into these deals thinking they'll be able to pay off the amount before the promotional period ends, but then lose a job or incur a major unexpected expense.
CreditCards.com points out that the CARD Act, plus forthcoming Federal Reserve regulations that kick in July 1, will significantly change the way these financing deals are described and marketed to consumers.
For instance, deferred-interest plans have to last at least six months, and retailers won't be permitted to advertise these plans with the phrase "0 percent APR" anymore. Plus, statements will have to include warnings that the promotional period is about to expire two months before the term is up -- and you get socked with all that back interest.
In addition, some retailers are adding minimum payments instead of offering plans that don't require a payment until the end of the promotional term.
Even these changes don't go far enough, the NCLC's Wu charges. Stores and the finance companies that manage their credit card programs make deferred-interest plans complicated on purpose, so even attempts to force them to explain themselves better are likely to leave some consumers scratching their heads.
Wu also points out that most of the details about that "free" interest are only spelled out after you've signed on the dotted line; in other words, after you've already been roped into the deal.
"There's a knowledge gap," says Wu. "It's not an easy concept."
Readers, did you ever sign up for a no-interest deal that turned out to be much pricier than planned?
CARD Act a start, but buyers can still be fooled by deferred interest plans