When 0% Interest Isn't 0%: Credit Card Tricks You Must Know

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Single red percent symbol among many dollars
Tim Arbaev
You are about to make a big purchase, and then you are given an amazing offer. Why pay the full amount now, when you can finance the purchase at 0 percent for 12 months? You sign up, and you feel smart.

Before you start feeling too smart, do you know if your 0 percent offer is deferred or waived interest? The difference is huge, and not very well understood.

I regularly receive emails and speak to people who didn't understand the difference and were shocked when a big interest charge appeared on their statement.

Deferred Interest

If you are being offered 0 percent financing by a store, it is likely deferred interest.

Imagine you are shopping at apple.com (AAPL) for a new MacBook. You decide to take the 0 percent for 12 months instant credit offer. The cost is $1,000. (Yes, we know. A new MacBook would cost a bit more. But we're using a round number to make the calculations easy.)

When you take out the deferred interest financing, you are actually opening a credit card. In this case, the credit card is managed by Barclaycard (BCS). The interest rate on that card is a shocking 22.9 percent or 26.9 percent, depending upon your creditworthiness. Lets assume you have excellent credit, so you get the amazing 22.9 percent interest rate.

In the first month, your $1,000 balance would have accrued about $19 worth of interest. That interest is deferred. Barclaycard does not charge you the interest but is tracking that number.

$20 a Month Only Goes So Far

Let's assume that you make $20 payments every month. At the end of the first month, that $20 payment would reduce your balance from $1,000 to $980, because interest is ignored during the deferral period.

Over 12 months, you will make $240 worth of payments, reducing your balance to $760. So far, so good. But by month 12, you have deferred $205 worth of interest.

Guess what happens in month 13? Barclaycard adds $205 to your balance (12 months of deferred interest).

The only way to avoid interest charges is to completely pay off the balance during the 12-month period. So, if you paid $83.33 per month over 12 months, then you would never pay interest. But, if you don't pay off the balance in full before the end of the promotional period, you are charged interest as if you never had a promotional offer at all.

This practice is common with stores. For example, Walmart (WMT) and Home Depot (HD) offer similar deferred interest products (via GE (GE) and Citibank (C)). If you are offered 0 percent financing by a retailer, chances are high that you are being offered deferred interest.

Waived Interest

If you really want interest waived on a purchase, then it is possible. But, you have to do some planning. That is a common theme in banking. If you plan, you can get a good deal. If you react to an offer at the checkout counter, you are likely getting a bad deal.

When a major credit card offers 0 percent on purchases for a set period, it is usually waived interest. For example, Chase Slate (CCF) offers 0 percent on purchases for 15 months. The interest is waived during those months. In month 16, the interest rate will increase from 0 percent to the standard purchase annual percentage rate (which can range from 12.99 percent to 22.99 percent).

Lets assume you decide to finance your Apple purchases. But, instead of saying yes to the offer at the Apple Store, you apply for a Chase Slate card in advance. You then use your Chase Slate to pay for the Apple products.

LIke our previous example, you pay $20 per month. At the end of 15 months, your balance would have reduced to $700.

Here is where you see the difference. In month 16, you will be charged interest on a go-forward basis. Lets assume you have a 22.9 percent interest rate. The charge in month 16 would be about $13 of interest. If Chase were a deferred interest product, the charge in month 16 would have been over $250.

Avoiding a Surprise

If you finance a purchase with a special 0 percent offer, and you pay off that purchase in full before the 0 percent promotion is over, then you will not pay any interest at all. That is the same, whether your interest is waived or deferred.

However, if you don't pay off the balance in full before the promotion is over, there is a huge difference. If you have a deferred interest product, you will be whacked with a massive interest charge after the promotional period is over.

To avoid the deferred interest trap:
  • Only buy what you can afford. If you really need to borrow money to buy that phone at Apple, you probably shouldn't be buying it.
  • If you are trying to be clever (by using 0 percent financing while keeping your money in a savings account), make sure you pay off the balance before the promotional period is over, otherwise you will be made a fool.
  • If you won't be able to pay off a deferred-interest product before the promotional period is over, then think about a balance transfer. To qualify, you will likely need a credit score of at least 700. Just give yourself a full month to get it done. Chase Slate would let you transfer the remaining balance, with no fee, for 15 months. Citibank Simplicity offers 18 months at 0 percent, with a 3 percent fee. At my site -- MagnifyMoney -- we keep an up-to-date list of balance transfer options
But let me be clear. I think deferred interest products are usually terrible deals for consumers. Too many consumers don't understand how the product works, and end up getting hit with big interest charges. In my conversations with salespeople (who try to push the offers), they don't really understand it. either.

The easiest advice: turn down 0 percent financing in stores.

Nick Clements is the co-founder of MagnifyMoney.com, a website that makes it easy to compare and save money on banking products. He spent nearly 15 years in consumer banking, and most recently he ran the largest credit card business in the United Kingdom.

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14 Comments

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Saint Michael

When I make a rare large purchase, such as a recent remodeling job, I use zero percent balance transfers. I prefer to use other people's money. Educate yourself by reading and understanding the terms. It's not hard, people.

September 18 2014 at 12:05 AM Report abuse rate up rate down Reply
ED

Anyone that doesn't understand this concept, or are not even aware of it being practiced, isn't smart enough to have a credit card. Rooms to Go has built a furniture empire on this concept of zero interest financing. Lowes and Home Depot do it. Most department stores do it. Every one of them has been quite clear how it works. If you don't pay it off during the interest free period, you get all the accrued interest tacked on. I have 3 accounts now I am going through this with. And, every one of them has the accrued interest, each month, clearly stated on my statement.

August 26 2014 at 8:43 AM Report abuse +1 rate up rate down Reply
fakeconomics01

Why don't our congress and government look into this kind of misleading businesses?

August 25 2014 at 7:29 PM Report abuse rate up rate down Reply
2 replies to fakeconomics01's comment
ED

Because they are doing nothing wrong.

August 26 2014 at 8:44 AM Report abuse rate up rate down Reply
hislonv

There is nothing misleading about it. They are very clear in telling you what will happen if you don't pay it all off in the timeframe of the free interest. If you don't pay attention then don't blame them for your ignorance of how it works.

August 27 2014 at 1:01 AM Report abuse rate up rate down Reply
fakeconomics01

Folks -- Is there something that is called fine print gimmicks? Let me tell you something. Credit card companies will not lose-----They can sell your addresses, personal information, your buying habits, what goods you buy, where you shop, are you compulsive about certain goods or items ----- please don't expect freebies --there aren't any and there will not be any

August 25 2014 at 7:09 PM Report abuse rate up rate down Reply
2 replies to fakeconomics01's comment
gee.effwye

My Costco AMEX has awesome rewards.

August 25 2014 at 9:41 PM Report abuse -1 rate up rate down Reply
Saint Michael

The "fine print" is there for a reason. People in America are too uneducated to read and understand it.

September 18 2014 at 12:02 AM Report abuse rate up rate down Reply
Melprime

.It’s quite simple: banks charge a balance transfer fee about 4 to 5 percent of the balance transfer amount .however knowing that beware; any future charges you make on the card will be charged from day of purchase the full APR. Banks do not disclose this in their so called zero percent balance transfer offers

August 25 2014 at 5:50 PM Report abuse +1 rate up rate down Reply
jl7503

Reach into your pocket, take out sufficient cash and pay for it before you leave the store.....no dazzle, no double talk, you simply have bought and paid for it. I have been debt free for five years and I would not charge an item or take "credit" terms if the sales girl offered to go home and sleep with me! That is how "sweet it is" to be debt free! Viva Dave Ramsey!!

August 25 2014 at 5:19 PM Report abuse +1 rate up rate down Reply
keanekansascity

principal divided by #0f months @ 0% would give you your monthly payments int free if it fits into your budget go for it but be sure to remain current on all your payments creditors love for you to be late its called" the rich get richer"

August 25 2014 at 5:05 PM Report abuse +1 rate up rate down Reply
Sonja Marie Walker

0/0 Interest free is always a SCAM! Just another way to trick the American public into spending money they do not have. Once you are free of debt, never, never fall for another way to get you back in.

August 25 2014 at 4:51 PM Report abuse +1 rate up rate down Reply
drmike15

If they give you 12 months deferred interest simply pay 10% a month and you'll be in the clear after ten months. Nothing to worry about then.

August 25 2014 at 4:08 PM Report abuse +1 rate up rate down Reply
1 reply to drmike15's comment
seawarriorteam

exactly. I never buy what I don't have in the bank but will use a deferred interest deal time to time. It's also called ---cash flow---- so instead of paying $2000 at once. Spread it out with no interest.

August 25 2014 at 6:34 PM Report abuse +1 rate up rate down Reply