With the holiday shopping season set to hit full bore and the average consumer expected to spend upward of $700 on gifts, food and décor, it's clear that many of us will soon consider the financing options at our disposal. It's extremely important that we're careful to avoid deferred interest payment plans, no matter how hard it is to distinguish them from the traditional 0% offers we've become accustomed to in recent years.
Of the more than 80% of major retailers that offer some form of financing, nearly two-thirds include a deferred interest option, according to Card Hub's 2012 Deferred Interest Study. Such plans give you an interest-free introductory period in which to pay your balance, but (and this is a two-airplane-seat kind of but) if the full amount is not paid by the time the regular interest rate kicks in, interest gets retroactively applied to the entire original balance.
That's what can make a retailer's deferred interest financing up to 28 times more expensive than a traditional 0% credit card.
So, by mistakenly opting for deferred interest you therefore run the risk of turning interest-free financing into high-interest financing by failing to pay off as little as $1 of your original balance on time.
For example, say that you spend $800 buying presents for your friends and family with a credit card that offers 0% for six months prior to a 20% regular rate taking effect. Before the six months are up, you find out that your daughter needs braces, and the money you spend at the orthodontist prevents you from allocating more than $700 to your holiday debt. Supposing you pay off the remaining $100 in the seventh month, you'll incur only $2 in interest under a standard 0% financing arrangement. However, if your 0% rate was actually part of a deferred interest plan, you'd have to pay $58 in interest and it would likely take you a month longer to become debt-free.
The idea is to save on your holiday spending, not to fall for profit-padding retail tricks.
The problem is, it's often hard to spot a deferred interest payment plan. In most cases, buyers will have to delve into the dreaded fine print because the retailers themselves usually aren't much help. According to Card Hub's study, 54.1% of the major retailers that provide financing options aren't transparent about the details of their programs, and employees across the board aren't trained to accurately inform customers about them.
It's also hard to guess which retailers offer deferred interest based on reputation. Among the following list of major retailers that offer deferred interest are extremely popular companies that have built their brands upon superb customer service and the development of consumer-friendly products:
* Best Buy.
* Big Lots.
* Dick's Sporting Goods.
* Home Depot.
* J.C. Penney.
* Neiman Marcus.
* Office Depot.
* Pottery Barn.
* Sports Authority.
* Toys R Us.
* Tractor Supply Co.
* Victoria's Secret.
Ultimately, either the retailers are going to have to proactively eliminate deferred interest plans or regulators will be forced to require better disclosures. Until then, you'll have to be careful when considering financing options offered through any retailer, especially the above companies.
In order to keep things simple, you may want to skip retailer-specific financing altogether in favor of one the best credit cards for holiday shopping. The ability to earn up to $500 with an initial rewards bonus or avoid interest for up to 18 months (via a traditional 0% offer, not a deferred interest plan) would certainly make the holidays more affordable.