Think Carefully Before Taking Advantage of This Credit Card ‘Perk’

It sounds like a good idea until you read the fine print.

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Retail credit cards offer special financing deals for large purchases such as “no interest for six months” which can sound tempting, but you need to make sure you know what you’re getting into.

Credit cards enable you to purchase items today that you can't pay for in full -- but at a high cost. Those who know the perils of credit card debt won't charge more to their go-to credit cards than they can pay off in a month. But even savvy credit card users view these special financing deals as an exception to the rule.

It’s not that these offers are too good to be true, but there are strings attached. What the card issuer doesn't tell you is that you're on a clock from the moment you make a purchase, and if you want the special financing deal, you have to make your deadline. If you don’t, you may face much higher charges than you’d planned for.

How special financing deals work on retail credit cards

Retail stores may advertise that you can make large purchases today with their store credit card, and then pay it back over a certain number of months or years without paying any interest. But the fine print reveals that you're not getting interest-free special financing, you're getting deferred-interest financing. 

If you pay off the full cost of a purchase within the advertised period, you won't pay any interest at all. But if you're even a day late, you'll be hit with a bill for all the interest you would have paid if you hadn't had the special financing offer at all.

Some retailers impose additional restrictions on the offer, such as requiring you to make every credit card payment on time. A single late payment could negate the special financing deal, and your balance could unexpectedly start to accrue interest. This could lead to a cycle of credit card debt you may struggle to shake off.

If you are already carrying a balance on the credit card that’s offering the special financing deal, you have to be especially careful. The law says that credit card companies are legally required to apply any money you pay over the minimum payment toward the balance with the highest interest rate first. So you may think you're paying money toward the item you purchased with the special financing deal, but your card issuer may be actually applying it to other purchases you had made before. The exception to this rule is that any payments you make during the last two billing cycles of your deferred interest period are applied to your deferred interest purchases first.

Is that special financing period worth it?

The special interest period will work exactly as advertised if you make all your payments on time and pay back the full cost of an item before the deferred interest period is up. But life can be unpredictable. An unexpected expense or job loss could render you incapable of making those payments. The card issuer will add the deferred interest to your balance, and then you'll have an even deeper hole to dig yourself out of.

You have other options if you're concerned about the potential consequences of agreeing to a deferred-interest financing period. You may be able to get a personal loan to cover the cost of the item, or you could sign up for a new credit card that has a 0% introductory APR period. If you fail to pay back the full cost of an item before the 0% APR period is up, the remaining balance will begin to accrue interest, but you won't have to retroactively pay interest on the amount you'd already paid off. 

You could also just wait a little longer to buy the item. Figure out how much you can budget for it each month, and put that money in a savings account. Then, buy it a few months later, when you've got enough money. That way, you don't have to worry about paying any interest at all.

If you decide to take advantage of a deferred interest financing period, read through the fine print carefully so you understand how much time you have to pay back the balance, and what actions, like late payments, may negate the offer. Make sure you're comfortable with these terms before you agree to them, and ask the card issuer if you have any questions.

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