The Difficulty of Deferred Interest Rates

The holiday season is fast approaching and there’s a chance you could be tempted by the siren song of store credit cards. However, there are some good reasons to avoid heeding the call, especially if you don’t understand a feature many of those cards come with: Deferred interest.

If you are struggling to come up with an explanation of deferred interest, allow us to enlighten you. This feature allows you to carry a balance — completely interest free — for a specified amount of time. Now you can see why many store credit cards offer it: You can suddenly afford that expensive item you were considering. In fact, CNBC reports that 85 percent of retail credit cards offer deferred interest. Unfortunately, 82 percent of American adults claim they don’t understand that concept. That’s a big red flag, because while deferred interest is great at first, you might not be ready for what happens when the interest does take effect.

Here’s the deal: Let’s say you sign up for a store credit card with a 25 percent deferred interest rate for a year. If you make your payments on time and pay off the card within that time frame, you’re golden. However, if you don’t, you get hit with interest on the full, initial charge, not whatever balance is remaining. That means if you pay off $950 of a $1,000 item and the interest kicks in, you owe an additional $250 (the 25% interest on the full $1,000), not $12.50 (25% interest on the remaining $50).

This holiday season, stay away from store credit cards. You might think you’ll nail the payments, but you can’t see into the future. If something goes wrong and you are hit with that huge interest rate, you’ll regret your move. If the price tag of a gift prompts you to consider a new credit card just to afford it, that means you likely can’t.