Confession: I once fell for a deferred interest offer. You know, those store credit cards that come with financing for purchases of homeowner necessities like refrigerators and couches? Though in my case, it was upgraded wedding bands for my wife and I as an anniversary gift. But less than two years later we were slammed with accrued interest because we lost track of time and didn’t know everything we know now about good credit management.
So, What Is Deferred Interest?
When you hear the term “deferred interest” it’s just what it sounds like: Interest on your purchase is deferred or delayed until a later date. When you defer interest, you pay no interest during a set period of time. If you pay off the balance before the period is over, you’ve paid zero interest on the total purchase. Sounds like a total win, right?
The catch is if you fail to pay off that balance in time. The interest you had deferred becomes now owed and, in some cases, the card or loan issuer may charge you retroactive interest from when you opened the account or made the initial purchase. In our case, we were hit with accrued interest from over an 18-month period which doubled the balance that was left.
Why Would Anybody Take a Deferred Interest Offer?
Good question! The answer seems simple: If you can avoid paying interest, why wouldn’t you? But, you’d be hard-pressed to find any credit card or loan expert recommending taking any financing with deferred interest. There are too many things that can go wrong, like taking a hit to your income with a job loss or maybe you’ve got other debt you’re trying to manage. Or maybe life just happens and you simply forget because many of these offers last longer than a year.
The idea of avoiding interest when you’re frugal (guilty!) but like to splurge sometimes is tempting. Our thinking when we went into the store was we’d use our Discover card, earn some cash back and pay it off as quickly as we could to avoid carrying a balance for too long.
The well-known jewelry retailer we visited was offering an 18-month promotional financing plan if we applied and were approved for the store’s credit card. Since we have no other reason to visit the store, we figured we could easily pay off our $4,314.43 purchase within a year—thereby avoiding paying any interest and using the credit limit to pad our credit utilization ratio down the road. Jewelry doesn’t have a history of being in Discover’s quarterly 5% cash-back window so we decided that avoiding interest on the purchase was the way to go.
Here’s What Happened
We’re pretty good at budgeting regular, everyday expenses both weekly and monthly. We’ve got a budget book that shows when money comes in and when each bill is due; we mark when they’re paid and how much we pay, whether something is paid off and when we did so. I can tell you the due date for every single bill and whether it’s been paid yet on any given day.
But we apparently neglected to add a notation about the deferred interest period. We were fairly new to understanding all the ins and outs of good credit management at the time and we made some good-sized payments the first few months. But we began reducing those payments to free up some cash to take care of some home fixes that popped up.
So, when the calendar year changed, the 18-month promotional period—and when it would end—was long forgotten. The result was getting whacked with what amounted to a doubling of the card balance from the accrued interest. A $1,700 balance became a $3,400 balance.
How To Avoid a Deferred Interest Hit
A deferred interest promotion can be tempting, especially if they’re longer than 18 months. But it’s important to keep a few things in mind to avoid taking a major interest hit.
- Keep track of the deferred interest period: Like, really keep track of it. Make a note where you’ll see it; look at the front page of your credit card bill regularly; or check your statement each month for any reminders about the period.
- Pay the balance off as soon as possible: We never recommend carrying a balance on any credit card, but if you do, make sure to pay it off as soon as possible. Take the amount you owe and do some old fashioned math to calculate how much you can pay each month to beat the deferred interest clock.
- Just say no to deferred interest: There’s minimal benefit—if any— to taking a deferred interest financing option. If you are offered deferred interest versus a credit card’s rewards points, take the points. Use a credit card you already have where you can maximize your earning. While most rewards cards don’t offer jewelry retailers as a category bonus, you can earn unlimited 2% cash back with a variety of excellent cash-back cards like the Citi® Double Cash Card or Wells Fargo Active Cash® Card.
- Consider a 0% APR credit card: Unlike deferred interest, credit cards with a 0% APR promotional rate will only charge interest on the balance due on the promotional end date. This means that if you spend $1,000 on a 12-month 0%APR and only pay half in the first year, you’ll be charged interest on $500, not the entire $1,000.