Are holiday credit card promotions right for you?
Budgets and holidays don’t always go hand in hand. Putting gifts on a credit card can be tempting, but interest charges might sour your spirit and you might be drawn to credit card promotions with enticing offers such as “no interest if paid in full in 12 months” or “0 percent intro APR for 12 months.”
They sound similar, and either can help you avoid interest for a while. But one merely defers interest , which can be more costly if you don’t understand the terms. Find out what you’re signing up for and whether it’s the right fit.
KNOW THE DIFFERENCE
Here’s how these two credit card promotions differ:
— Deferred interest: You won’t pay interest on your qualifying purchase if you pay it off in full during the promotional period. But if any balance is left over at the end of the promotion, you get charged interest for the entire amount of the transaction from the purchase date.
— Introductory 0 percent annual percentage rate: No interest accrues on purchases you make during the promotional period. If you have a balance when the promotion ends, you’ll pay interest on that amount only from that date forward.
The National Consumer Law Center calls deferred interest offers a “deceptive bargain “ and advises people to avoid them. The Consumer Financial Protection Bureau has warned credit card companies against deceptive marketing of interest rate promotions.
“A true 0 percent APR offer is much better for consumers,” says Chi Chi Wu, a staff attorney at the law center.
PITFALLS OF DEFERRING INTEREST
Deferred interest offers carry risks and can get complicated. Drawbacks may include:
— Higher APRs. The average APR charged in 2016 on credit card accounts that incurred interest was 13.56 percent, according to the Federal Reserve. But the average APR on deferred interest credit cards is 24 percent and can reach 29.99 percent, according to an NCLC report. When your promotional period ends and that APR kicks in, the interest payments can get expensive, particularly if you’ve used the card for other transactions. And if you’ve taken on other financial obligations in the meantime, such as a car or home repairs, the card payments may be too much to handle.
— Confusion over interest. Generally, your original purchase qualifies for the deferred interest offer, as might any purchases made within a specific time frame. But additional transactions — such as cash advances, balance transfers and other purchases — may be subject to different terms or APRs.
Minimum monthly payments may not be enough to pay off your balance by the promotion’s expiration date. Divide the cost of your purchase by the number of months in the promotional period and pay that amount monthly to meet the deadline.
Also, avoid using the card for other transactions during this period. Budgeting for payments on a single transaction is easier. If you do use the card for other transactions, you can ask the issuer to allocate payments above the monthly minimum in a specific way — but the issuer doesn’t have to honor those requests.
— Possible loss of grace period. If you pay your balance in full every month, your card likely gives you a grace period — some time to pay off new charges before they start accruing interest, typically until the next due date. You could lose that cushion by carrying other balances on the card.
This is generally the case for both deferred interest offers and true 0 percent intro APR offers: If you carry a balance, any additional transactions that aren’t covered by the promotion could get charged regular interest from the date you make them.
WHAT TO CONSIDER
If you plan to take advantage of a holiday credit card promotion, keep these tips in mind:
— Review the terms of the offer.
— Set reminders about the promotion’s expiration date.
— Try to make payments above the required minimum.
— Avoid making other purchases on a card with a deferred interest promotion.
You also could look for store credit cards with true 0 percent intro APR promotions or consider a general 0 percent intro APR credit card that offers rewards.
Above all, make sure you won’t be left with a holiday debt hangover. “You need to know if you can afford what you borrow under regular circumstances and even in worst-case scenarios,” says Bruce McClary, spokesman for the National Foundation for Credit Counseling.