This post is inspired by a friends’ recent request for advice. A lot of the time, people see great offers for 0% APR. We think,
Wowee, that’s great! Now I can buy my [insert wonky overpriced consumer item here]! It’ll be so cheap, since there’s no interest on the first year!
But wait, there’s more!
More interest, that is. See, most of these offers are deferred interest, not waived interest.
Deferred interest is best thought of as real interest that just doesn’t hit your account until the end of the promotional period. You get to defer it until a later date. For example, you charge $1,000 to a deferred interest account (with a 12 month 0% APR). Unless you pay it off within those 12 months, you’re going to owe all the interest that would have been charged to it. If you take longer than that 12 months, you basically never had 0% to begin with. They’ll still charge you the interest, just not until later.
Deferred interest programs are very common on store credit cards, or on special store financing options. Some stores have actually switched the wording (in part due to the CARD Act) to say something like “No interest if paid in 12 months” which is much easier to understand. This is exactly what deferred interest means. If you pay the full amount within the 12 months, hey, look at that, no interest! But if you ]go over that 12 month period by even one day, you typically have to pay the interest that would have been accumulated on each month’s balance. The same usually goes for any late payments, or any time you don’t meet the minimum monthly payment. If you fail to meet the stipulations on the agreement (ie. late payments) you can usually be charged interest.
This gets extra tricky if your card has one charge with deferred interest, and other charges that are not deferred interest. The credit card company will automatically apply payments to the balance with the highest APR, if the balances are treated separately. So you may think you paid off your deferred interest amount, but haven’t yet. If you have an account like this, be sure to designate the payments for whatever makes the most financial sense for you.
Deferred balance looks something like this. Let’s assume you have a 12 month 0% financing option. Month 1: You apply, get approved, and finance a $2,000 amount. You pay off $100 each month. At the end of the 12 months, you still owe $800. You’ll then be charged all the interest you would have accrued. So you get charged for the interest on a $1,900 balance at Month 2, plus the interest on a $1,800 balance at Month 3, plus the interest on a $1,700 balance at Month 4, plus….you get the idea. When you look at it this way, the interest is definitely not zero.
Waived interest is less common on store cards and special financing options, but can be found on good balance transfer credit cards. As an example, the Discover it, Chase Freedom, and Citi Double Cash and is currently offering a 0% APR promotion. There is no interest charged during the promotional period. Usually the only requirement is taking care of the minimum payment each month, otherwise you can be penalized. Even so, the interest is only charged to the remaining balance, moving forward on the card.
Let’s look at waived interest. Same example as above: a 12 month 0% APR period. Month 1: You apply, get approved, and finance a $2,000 amount. You pay off $100 each month. At the end of the 12 months, you still owe $800. At Month 13, you’ll be charged the interest on an $800 balance for one month. That’s it, end of story. They don’t come after you at all for the past 12 months.
Ok, But Why Does That Matter?
If it’s not clear yet why this matters, let me explain. Waived interest is just that, it’s totally ignored. They don’t charge you anything. Deferred interest is still interest. You just don’t have to pay it until later. It’s almost like a super credit card. Not only do you not have to pay for the purchase right now, you don’t even have to pay for the interest yet! And it can be super useful, or it can be super terrible, if not managed properly.
As always, make sure you read any terms and conditions associated with the account your’e considering. Get a very clear answer on what kind of interest is being applied during the promotional period. Deferred interest should only be used if you are absolutely certain you’ll be able to pay off the account in full before the end of the promotional period.
I have to throw another word of advice in here: Try to avoid store financing when you can. If it’s truly 0% APR, and you can definitely pay it off within the time frame, then yes, it’ll probably still work. There’s a problem when you can’t pay it off like you planned. If any emergency comes up that prevents you from being able to pay it off on time, then what happens?. Something happens, and you need even 50 bucks? If you owe that $50 at the end of the 12 month period, that fridge/ring/TV just cost you way more than the sticker price, because they’ll charge you the interest on the whole cost, not just that 50 dollars.
I am always an advocate of saving up some cold, hard cash and then buying the item. Of course, you still put it on the card, to make sure you get some frequent flyer miles! But you pay it off right away, and don’t let those credit card companies gouge you on interest!