Imagine you are in the market for a new surround sound system. You take a trip to Best Buy and find the ideal surround sound system which will allow you to enjoy your music and movies in crisp, blaring decibel levels. Unfortunately, you don't have the $3,500 in cash to purchase it and your dreams of dinner parties with your favorite album crisply playing in the background are immediately destroyed. You start to exit Best Buy, a deflated version of your former self, when a voice stops you in your tracks. The voice belongs to a Best Buy employee offering credit, absolutely interest free for an allotted time period, to purchase the system. You are elated and immediately jump on the offer, but you shouldn't act so quickly. You were just offered a deferred interest line of credit.
There are some important issues to consider before accepting an offer for a deferred interest line of credit. These deferred interest promotions offer a line of credit, interest free for a specified amount of time. Upon expiration of the promotional time period, if the entire outstanding balance encompassed within the promotion is not paid in full, you will have to pay the piper.
A report published by the National Consumer Law Center (more information and the entire report can be found here) provided that "the two leading providers of deferred interest credit cards are Synchrony Bank (formerly known as G.E. Capital) and Citibank. Both lenders offer deferred interest credit card plans through retailers, such as Walmart, Sears, J.C. Penny, Macy's, Best Buy, Home Depot, and Staples."
The report also compiled the following list of pitfalls associated with deferred interest plans:
Inherent deception
Many deferred interest plans charge consumers interest retroactively for the entire deferred interest period of the consumer does not pay off the balance in time. Because these plans are so complicated, the written disclosures are difficult for consumers to understand.
High APRs
Deferred interest credit cards typically carry very high interest rates, with an average of 24% and as high as 29.99%. These rates can be almost twice as much as the APR for a mainstream, prime credit card, which is typically about 14%.
Balloon interest charges and interest on interest
At the end of the promotional period, charges come all at once in one, large sum. Consumers are often unable to pay this large amount and get hit with interest charges on top of back interest.
Impact on the most vulnerable
A Consumer Financial Protection Bureau (CFPB) study found that over 40% of consumers with subprime credit scores were unable to pay off their balance in time. Meanwhile, 90% of superprime consumers do not get hit with deferred interest and are therefore privilged with interest-free financing. Therefore, credit card companies make a much greater profit off of the financially vulernable, and even take advantage of it.
Minimum payments don't pay off the balance
Lenders generally set the minimum payment as less than the amount that would pay off the balance during the deferred interest period. Thus, consumers who make only the minimum payment – often thinking they are doing what they need to do to avoid interest – will inevitably be hit with retroactively assessed interest at the end of the deferred interest period.
Difficulty allocating payments to successfully avoid retroactive interest
Consumers can often struggle with allocating payments properly to ensure that their deferred interest gets paid off, especially if they are making purchases that do not have deferred interest or that have different promotional periods.
If utilized properly and carefully monitored, deferred interest lines of credit may be a beneficial financing option. However, consumers should proceed with caution, distinguishing when interest will be deferred on separate charges on the same card and figuring out when the promotion period expires can be confusing, resulting in unanticipated debt.
If you are being sued over credit card debt you should contact us for a free consultation to discuss your available options.