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Beware of deferred interest promotions on credit cards

Holiday shoppers need to be aware of the dangers of deferred interest promotions on private brand credit cards. These promotions entice consumers with promises such as “no interest for 12 months” or “0% interest until December 2019.” They do not disclose that consumers who don’t pay off the entire balance before the promotional period ends will be hit with a huge lump sum interest charge going back to the date of purchase, even on amounts that have been paid off.

Furthermore, making the minimum required payment each month will not pay off the debt, so that a consumer that makes the minimum required payment each month will get a hefty interest charge. Even if the consumer plans to pay off the debt by the end of the promotional period, unforeseen emergencies may make it impossible to do so. Finally, if you use the same card to make other purchases that do not have a deferred interest promotion, the credit card issuer may apply most of your payments above the minimum to the other purchases, making it more difficult to satisfy the terms of the promotion.

For example, if a consumer buys a $2,500 laptop on November 30, 2018 using a one-year 24% deferred interest plan, then pays off all but $100 by November 30, 2019, the creditor will charge 24% interest on the entire $2,500 from November 30, 2018. This is about $400.

Retailers using deferred interest promotions on private brand credit cards to sell big-ticket items include Amazon, Apple, J.C. Penney, Menards, Home Depot, Zales, and Best Buy. The cards are issued by arrangement with Synchrony Bank, Comenity, and Citibank, among others. The interest rates on the private brand cards are typically in the 24% to 30% range, compared to an average 14% on most general purpose cards.

Interestingly, Walmart stopped using deferred interest promotions in 2017. It now issues private brand credit cards in conjunction with Capital One, replacing Synchrony. Walmart and Capital One offer true 0% interest promotions, under which there is no interest for the specified promotion period, whether or not the debt is paid off during that period. Interest begins prospectively at the end of the promotion period.

Most consumers think that what is being offered is the Walmart-type arrangement, when that is not the case. The deferred interest promotions are inherently deceptive, and the Federal Reserve Board was going to ban them in 2009. However, the Board then reversed itself under pressure from the industry.

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