Credit Card Company Tricks

If you’re in the process of making a large purchase – like a new memory foam mattress, a laptop computer, or a flat screen TV – the retailer may offer financing options. If you’re financing a big purchase, it’s critical to know the difference between deferred interest and waived interest. While financing options generally offer zero percent interest during the first six to twelve months, deferred interest is tricky to navigate.

The Path To Follow

If you take out deferred interest financing, this means you’re actually opening a new credit card, which is usually managed by a company other than your current creditor. The interest rate on this new card is extraordinarily high, and may equal between 22 and 30 percent, depending on your current credit status. In the first month, then, your balance of hundreds or thousands of dollars will accrue interest – but this interest will be deferred until after the zero interest grace period.

As such, any payments you make will reduce your balance, but if you don’t pay off the total cost in the zero interest grace period, you’ll have deferred the interest. For example, if you pay $20 per month for 12 months on a $1000 purchase, you’ll have a balance of $760 at the end of the year – in addition to $205 worth of interest. When the 13th month begins, you’ll have an added $205 tacked onto your bill.

If you do pay off the full purchase before the end of the zero interest promotion, you’ll have no interest at all. However, if you know you won’t be able to pay off the full product balance before the end of the promotional period, consider a balance transfer, or speak with a credit card counselor to figure out next steps.