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Watch Out for Deferred Interest Financing During the Holidays

Picture the last time you were in the checkout line at a big-box store with a spendy purchase. Did the cashier ask if you were interested in signing up for the store's credit card so you could take your shiny bundle home with 0% financing?

We've all been there. And there's a good chance that they were trying to get you to sign up for a deferred interest card. With the coronavirus straining many family's budgets, we'll likely see even more of these offers throughout the holiday shopping season.

These deferred financing offers can sound like a sweet deal, like an interest-free loan... except they're not unless you know how these tricky financing offers actually work.

How deferred financing offers work

A 0% deferred financing offer works like this: you apply for the card, and if approved, you can charge that purchase to the card on the same day (even right at the cash register, in some cases). You'll then get a certain number of months at 0% interest. This is known as the promotional period or interest-free period.

Here's the kicker. If you pay off that purchase in full by the end of the promotional period, you're in the free and clear. You won't owe any interest at all, and it will truly be interest-free financing.

But if you don't pay off the balance in full, you'll be charged interest retroactively back to the very start. Thus, you won't save any money at all, and you'll be slapped with that big interest charge all at once. And since deferred financing cards generally carry higher-than-normal interest rates outside of that 0% period, you'll have an even larger amount to pay off.

These types of cards are especially tricky because if you just make the minimum monthly payment, you generally won't pay off the charge by the end of the promotional period. This means if you rely on the credit card issuer to tell you how much to pay, you're virtually guaranteed to have to pay that big interest charge.

How deferred financing cards differ from 0% intro APR credit cards

Deferred financing cards will charge you interest all the way back to the start if you don't pay off your balance in full by the end of the promotional period. Zero percent intro APR credit cards, on the other hand, won't charge you interest retroactively. If you still have a balance at the end of the promotional period, you'll owe interest on that smaller balance alone, and that's it.

Deferred financing cards market themselves very similarly to 0% intro APR credit cards, so it's easy to see how you might be confused between the two. To clue you in on whether a card is a deferred financing card, look for language like "no interest if paid in full by X date." Otherwise, if it just says "no interest for X months" with no other rules or qualifiers, chances are it's a 0% intro APR card.

How to come out ahead with deferred interest financing

The truth is that deferred financing cards aren't inherently bad. They're usually very easy to get (even with less-than-perfect credit), so they can be an important credit-building tool. But if your goal is to use them to save money, here's what to do:

  • Check your budget: Know what you can afford to pay towards your credit card each month. You can then use this as an upper limit on what you can afford when shopping around. The lower, the better, but don't go beyond this amount.
  • Check your costs and financing offers: Check to see what your purchase will cost and what deferred financing offers are available. Then, divide these two numbers to see what you'd have to pay each month to pay it off in full by the end of the promotional period. For example, if you want to buy a $1,000 TV with a 12-month promotional period, you'd need to pay at least $84 per month to make sure it's paid off by the end.
  • Set your payments on auto-pay: Once you've figured out how much you'll need to pay each month to pay it off in time, make sure to set up those payments on auto pay. That way, you'll be sure you'll get it done in time.
  • Avoid using the card while you're paying it off: Depending on your card's specifics, any new purchases could be charged interest from the get-go. In that case, any extra payments you make would likely go towards the highest-interest balance, and this could make it difficult or impossible to pay off that original promotional financing offer in time.

Deferred interest financing offers are certainly tricky to understand, but if you use them right, they can still be a great help to you. The key is to understand the mechanics behind it and to make sure you're on the right side of them.

Lindsay VanSomeren

Lindsay VanSomeren is a financial writer living in Kirkland, Washington. She's written for The Balance, Credit Karma, LendingTree, and more.