Zero percent interest deals can be a trap

Gail MarksJarvis, Chicago Tribune

Attention holiday shoppers: Zero percent interest often isn’t free.

It can be a trap that will cost you dearly. So before being enticed by the zero percent interest you may be offered on a store credit card, notice the tiny print in the agreement and realize that the deal you think you are getting is probably trickier than you think.

“No interest sounds tempting now, but you could end up in the trap of huge interest payments later,” said Chi Chi Wu, attorney for the National Consumer Law Center.

The center has been warning shoppers about what’s known as “deferred interest,” or the misleading promise that you will pay no interest on a store’s credit card if you always make payments on time and pay the card off entirely by a specific date.

That sounds simple enough upfront. But Wu is troubled because the deals often aren’t as simple as they appear. She says tricks are used to confuse shoppers, and the center has been asking the federal government to clamp down on the practices.

Customers often don’t realize they can make all their monthly payments on time, and it still won’t be good enough to keep the “deferred interest” promise intact. That’s because a common practice is to charge you less each month than you will actually need to pay in total if you are going to pay the purchase off fully by the final due date. So while you are going along each month, convinced you are living by the rules and making every monthly payment just as you are supposed to be doing, you can end up passing the final day of the deal without paying off everything you needed to pay.

As a result, not only will you have to pay interest on the tiny amount left to pay off after the due date, but since you missed the due date it will be as though you failed to make payments from the day you made the purchase. You will have to go back to the day you first made the purchase, and pay high interest on the full purchase.

Consider this example: You are holiday shopping and are tempted to buy a $2,500 stereo system. You hesitate, thinking that’s a pretty intimidating purchase. But then you are told you can pay back the purchase slowly over a year using zero percent interest on the store credit card. So you go for it. You know you have 12 months ahead to diligently pay the bills each month. And month after month you pay a couple of hundred dollars. Then the 12 months are up and you find out you still owe $100 on the balance.

Then comes the shocker: You don’t just owe $100 and the tiny amount of interest you would pay on a mere $100. Now you owe interest on the original purchase. It’s as though you never had a zero percent deal and that interest has been accumulating at a high rate of 24 percent. Besides paying $2,500 for the stereo, the lender will add about $400 to your next bill, says Wu.

Credit cards with deferred interest generally carry very high interest rates. A typical rate is 24 percent, but it can be as high as 29.99 percent.

Paying that level of interest is especially disconcerting, because you would have had a cheaper alternative with a standard credit card without the zero interest promotion. The typical credit card APR, or annual percentage rate, is 14 percent.

There are also other traps in the zero interest arrangement that take consumers by surprise. If a person has used a card with a zero interest promotion for one purchase, and then later uses it again for something else, bill payments often don’t count the way a person might expect. Most of the payments above the minimum will be applied to the second purchase. That will make it nearly impossible to pay off the deferred interest balance, said Wu.

She said that deferred interest is one of the few remaining “deceptive” credit card practices used to collect sizable interest payments from unwary consumers. Many other practices were eliminated with the Credit Card, Accountability, Responsibility and Disclosures Act of 2009.

Deferred interest is often pitched to people who would otherwise be reluctant to make big-ticket purchases like electronics, appliances and furniture. The National Consumer Law Center has found deferred interest promotions used widely, including at major chain stores and by large credit card issuers.

The center has been particularly troubled by the practice of using deferred interest for dental work and other health care expenses. The Consumer Financial Protection Bureau and the New York attorney general have brought enforcement actions related to some medical practices.

Gail MarksJarvis is a personal finance columnist for the Chicago Tribune and author of “Saving for Retirement Without Living Like a Pauper or Winning the Lottery.”