How Interest on Retail Credit Cards Can Cost You More Money - TheStreet

NEW YORK (MainStreet) — Financing your next big ticket purchase through the retailer’s credit card seems to be a no-brainer when in fact it could cost you hundreds more in interest.

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While deferred interest plans appear to be a good idea since they usually offer 0% introductory terms to finance the purchase, they come with hefty catches where consumers can wind up paying more in interest than the purchase itself.

If you leave an unpaid balance of even just $1 at the end of the introductory period or you miss a single payment, interest will retroactively apply to your entire original purchase amount, said Alina Comoreanu, a research analyst for CardHub, a Washington, D.C.-based credit card comparison website.

What shoppers initially believed was a great deal could quickly evolve into a nightmare and cost them more money than they had bargained for during the purchase. Avoiding deferred interest is important for consumers to stay within their budget during the holidays, as 69% of major retailers offer financing options to their customers. Of the major retailers that provide financing, 50% currently offer a deferred interest plan.

Under a deferred interest payment plan, paying off your credit card debt one month behind schedule or missing a single payment could increase your financing costs by more than 27 times. Of the retailers that currently offer deferred interest, 29% scored very low on CardHub’s transparency scale because they bury information in footnotes or terms and conditions pages. This is down from 41% last year. Only 29% of the retailers offering deferred interest had complete and easily accessible information about the terms of their plans on their websites.

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Consumers are probably better off using a traditional credit card for larger purchases. If you make a purchase totaling $800 that is paid with a traditional credit card which offers 0% on new purchases for six months, it charges a 20% regular interest rate. If you miss your payoff goal by one month and pay off your total balance in seven months instead of six, you would only pay $2 in interest.

If you instead choose a card that offers deferred interest, you will pay 27.5 times more interest or $55, easily eradicating any Black Friday or Cyber Monday deals you might have scored. To boot, it will also take you an additional month to become debt free.

“CardHub’s report sheds some light on the dark side of holiday spending and shows the financing options available through 50 large retailers,” she said. “Our analysis reveals that many retailers offering deferred interest financing are less than upfront about the true potential costs of these plans and you can read it at http://www.cardhub.com/edu/deferred-interest-study.”

Deferred interest is financing which is often offered by retailers where they offer an interest free option for 12 months typically, said Kevin Gallegos, vice president of the Phoenix operations for Freedom Financial Network, a company which helps consumers resolve debt issues. The option works for consumers who can make the scheduled payments and never miss one.

Reading the fine print is key before signing up for one of these offers since some deferred interest promotions may run by weeks instead of months, so they might have a different ending date from your regular monthly payment due date, he said.

“In general, it’s a good idea to stay away from retail store card offers,” Gallegos said. “The initial savings might look appealing, but if you cannot pay in full or miss just one due date, the costs can be significant.”

Since these cards are sometimes issued by finance companies, they can in some cases have a negative effect on credit scores.

“Most people are better off using their regular credit card with the same caveat: charge no more than you can pay off in full and on time each month,” he said. “It can be tempting to overspend during the holiday season, but racking up charges, interest and fees only makes it worse.”

Buy now and pay later plans can benefit the consumer, but only if the consumer knows and follows the terms of the agreement, said Gail Cunningham, spokesperson for the National Foundation for Credit Counseling, a Washington, D.C.–based non-profit.

“That involves reading the agreement, especially the fine print,” she said. “If you have questions, ask them and make sure the answers align with what is in print, as verbal promises won’t pay the interest if the contract is not fulfilled,” she said.

--Written by Ellen Chang for MainStreet

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