Consumers Are Still Confused About Deferred Interest Terms

19. November 2017.
Record holiday spending is projected for 2017 and retailers will woo shoppers with door busters, discounts and even “special financing” deals on store credit cards.

More than three-quarters of American consumers expect to spend the same or more this holiday season, according to the National Federation of Retailers. And with credit card balances generally increasing, some cash-strapped shoppers will be tempted by store card financing offers which promise zero interest for a promotional time period.

Yet, 72 percent of Americans considering using financing this holiday are not aware there of all the potential costs to using “deferred interest” promotions on store credit cards, a new by LendingTree survey found.

What some holiday shoppers don’t understand

A 2015 Consumer Financial Protection Bureau study found that 25 percent of consumers missed paying off the balance for 6-month promotional offers (the most common type of 0% promotion) in 2013. Presumably, some of these consumers didn’t pay off the balance not because they didn’t have the means, but because they didn’t completely understand the terms of the offer.

To understand how Americans, approach store credit card special financing offers, by LendingTree conducted a national survey of 1,000 American adults who said they would consider using a 0% APR for six months or longer to help pay for holiday shopping. The survey was conducted Nov. 6-8, 2017.

The CompareCards survey confirmed there was a lack of understanding around the interest trap that comes with these credit cards.

Deferred interest on credit card balances cost consumers more than they think

Retailers offering store credit card promotional offers often entice shoppers no interest on purchases if the balance is paid in full by a certain time — 6- or 18-month financing is typical. The minimum payments during the promotional period usually aren’t enough to pay the entire balance.

If there’s still a balance when the promotional period ends, the consumer is charged interest on the balance for each month from when the purchase was first made. But many consumers believe they only owe interest on the balance remaining after the promotion ends.

Only 28 percent of consumers correctly answered a question about how interest would be charged when presented with basic “no interest if paid in full” store credit card terms, even though 56 percent of respondents correctly identified the definition of deferred interest.

The misunderstanding can be costly. According to The National Consumer Law Center, “if a consumer buys a $2,500 living room set on January 2, 2016 using a one-year 24% deferred interest plan, then pays off all but $100 by January 2, 2017, the lender will retroactively charge nearly $400 interest on the entire $2,500 dating back one year.”

To add to confusion, the traps of store cards aren’t typically found on bank branded cards that offer true 0% interest deals. With those, a borrower can get 0% on purchases for several months or longer, and not pay any deferred interest, even if there is a balance left at the end of the promotional 0% period. These offers can be a valuable tool for consumers looking to smooth out spending versus their income flow.

The key for consumers is to shop around online for bank branded offers before going to the store.

Bottom line

Holiday shoppers are vulnerable to unexpected interest charges on deferred interest credit cards. These offers can save money when used properly, but many Americans don’t understand the interest trap these cards pose.

Methodology by LendingTree commissioned Qualtrics to conduct a national survey of 1,000 American adults who said they would consider using a 0% APR for six months or longer to help pay for holiday shopping. The survey was fielded online Nov. 6-8, 2017.

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