You may be offered a deferred interest rate if you use a store credit card or retail store financing to make a large purchase. These promotions delay rather than eliminate accrued interest on credit card purchases for a set period of time. If you do it well, deferred interest can save you money. But it can also be expensive if you don’t understand how it works.
Here’s everything you need to know about deferred interest and how to decide if this offer is right for you.
What is deferred interest?
Deferred interest is essentially what it looks like. This is a type of financing that allows you to defer interest payments to a later date.
Retailers that offer in-store financing or hold credit cards can use deferred interest promises to attract new customers. For example, if you’re buying new living room furniture, the store might offer a 24-month interest financing deferral.
“It allows you to pay for something using a loan with an interest-free or zero interest rate, which means that when you make payments for a purchase, your entire monthly payment goes to the balance on the card or credit,” says Deacon Hayes. , founder and owner of Well Kept Wallet.
Deferred payments won’t hurt your credit, as issuers and lenders report approved deferrals as reputable accounts with credit bureaus.
How deferred interest works
Deferred interest does not mean interest free. You’re just delaying your interest payments. When you have to pay interest depends on the terms of the financing. For example, your deferred interest period could be anywhere from six months to 24 months. During this time, you are not required to pay interest, but interest will still accrue on the original purchase amount.
If you pay the balance in full before the end of the promotional period, you will not have to pay any interest. However, if you still have a balance (even a few dollars), you will have to pay back all interest accrued since the date of purchase. This can be costly if you have made a larger purchase using deferred interest financing, which entails a high annual interest rate.
Pros and cons of deferred interest
Like any line of credit, it has its advantages and disadvantages. Carefully weigh and consider the costs and benefits of deferred interest financing before deciding if it is the right choice for you.
pros
- Convenient financing option
- Can help with the budget for large purchases
- Some offers include discounts on purchases at registration.
Minuses
- Very expensive if it doesn’t pay off
- Opening a new card means a difficult credit request
- Higher average interest rates
Deferred interest compared to credit card offers at 0% per annum
Deferred interest rate offers and zero interest credit card stocks may seem the same, but there are some key differences.
“The difference between deferred interest and zero interest on a credit card is that with a credit card, when the initial zero interest period ends, you don’t [owe] return interest from the original purchase,” says Hayes.
The easiest way to know if you’re signing up for a deferred interest rate plan is to read the fine print on the financing agreement. In particular, look for language related to:
- How interest is calculated
- The rate at which interest is charged
- Regular purchase of annual
- When the final closing date is for the balance to be paid in full to avoid interest charges
The fine print of the Amazon Store Card, for example, contains the following language explaining how special deferred interest card funding offers work: “Interest will be charged to your Amazon Store Card account from the date of purchase if the promotional balance is not paid in full within six , 12 or 24 months respectively”.
The fine print goes on to say that to avoid interest on Special Funding, you need to: “Pay all advertising balance in full before the end of the offer period to avoid interest on your purchase.”
If the funding is indeed 0%, then the cardholder agreement will use different wording. For example, the Discover it® Cash Back card includes the following language in its rates and terms: “Annual interest rate (annual) for purchases: 0% at the start of APR for 15 months from the date the account was opened. After the initial annual income, your variable annual interest rate will be between 12.24% and 23.24% depending on your creditworthiness.”
It is important to understand these differences so that you know how much you may end up paying in interest.
“If you are aware of all the specifics of deferred interest financing, it can be profitable,” says Nathan Wade, director of marketing for WealthFit Investing. “However, if you are not good at understanding, there is a chance that you will pay more than you bargained for.”
How to make deferred interest rates work for you
If you are thinking about using deferred interest financing, having a plan is the best way to use it to your advantage. This starts with looking at your budget to see how much you can realistically afford to pay each month.
“You will probably have to pay more than the minimum payment to be able to pay off the entire balance without being charged deferred interest,” says Hayes.
Let’s say, for example, that you make a $1,200 purchase with 12 months of interest deferred. You will need to pay at least $100 per month to zero out the balance to avoid interest charges.
If you cannot pay off your credit card balance before deferred interest is applied, choose to transfer your balance to a credit card with a zero annual interest rate. Remember that you will have to pay a fee to transfer the balance, but it will usually cost much less than the amount of deferred interest that accumulates over time.
Alternatives to Deferred Interest Offers
Even if you have a plan to pay off your balance in full on time to avoid deferred interest, we all know that life is full of surprises, and if unexpected expenses derail your repayment plan, you could be stuck with a huge bill. . That’s why it’s better for most people to choose a credit card with a starting interest rate of 0% on purchases.
There are many cards that offer generous zero interest introductory periods, including:
- Discover Cash Back: initial rate of 0% per annum for the first 15 months on purchases and balance transfers, then a variable annual rate of 12.24% to 23.24% is applied.
- Bank of America® Customized Cash Rewards Credit Card: Initial rate of 0% per annum for the first 15 billing cycles on purchases and balance transfers made within the first 60 days, then a variable annual rate of 14.24% to 24.24% applies .
- BankAmericard® Credit Card: Initial rate of 0% per annum on purchases for the first 18 billing cycles on purchases and balance transfers made within the first 60 days, then a variable annual rate of 13.24% to 23.24% is applied.
- Chase Freedom Unlimited: initial 0% APR on purchases and balance transfers for the first 15 months, then a variable annual rate from 15.24% to 23.99% applies.
The advantage of using a card with an initial 0% interest on purchases is twofold.
First, if you don’t pay in full before the end of the promotional period, interest will only be charged on the remaining balance, not on the original balance.
Secondly, you can get rewarded for your purchase if you choose a cashback credit card. These rewards can be applied as a loan statement or cash back that you can use to pay your bill, reducing the amount you have to repay out of pocket.
When comparing introductory cards with a 0% annual interest rate, consider the fee structure along with the annual fee. And of course, look out for the usual variable annual interest rate for purchases after the end of the promotional period in case you can’t pay off the balance on time.
bottom line
Delayed interest promotions are a way for retailers to get customers to sign up for their store’s credit cards. While this looks like an initial 0% period, deferred interest actually accumulates and is charged to the account if the entire purchase is not paid at the end of the period. For most people, it is better to apply for a credit card with a starting rate of 0% per annum than to opt for a card with deferred interest financing. However, if you can pay off the entire balance of your purchase before the due date, deferred interest cards can help fund large purchases that pay off over time.
Editorial disclaimer
The editorial content on this page is based solely on the objective judgment of our contributors and is not based on advertising. It was not provided or ordered by credit card issuers. However, we may receive compensation when you click on links to our partners’ products.
