Words can tell the truth or they can hide some very deceptive truths.
Nowhere is that as evident as when it comes to credit card accounts. The offer of no interest if paid in full within 12 months is a common come-on that is used to entice you to buy. Then there is the similar pitch of the zero percent introductory annual percentage rate (APR) on purchases for 12 months.
On the surface, they look the same, but they aren’t equal. One can cost you far more than the other.
These accounts often come into play when buying a large purchase such as a sofa or other piece of furniture. The difference between the two cards is that one charges no interest while the other defers interest.
Deferred interest credit cards are often used when purchasing furniture, tires, appliances, and even on medical or dental services. The offer of no interest if paid in 12 months does not result in no interest. The interest is accrued, just not posted. If you pay your original balance off before the 12 months is up, there are no extra charges. However, if it isn’t paid completely, the total accrued interest is posted on your account. Even if only a small amount remains, the total of the deferred interest is due.
These accounts also come with a second challenge — usually a higher interest rate, ranging as high as 25 percent. That $1,000 sofa will accrue $250 of interest even if you have a tiny bit of the original amount owed still not paid.
The other account with the zero percent introductory annual percentage rate actually accrues no interest rate for the introductory period. However, at the end of the time, the interest rate will jump to a higher rate, again in the vicinity of 25 percent. If you have a balance on the card at the end of the period, it will start accruing interest at that point.
These accounts are usually in the form of store credit cards that comes in at a much higher rate than the standard bank card. They have their place in the banking world — just make sure you use their features in a way that is advantageous to your fiscal situation.
There are some words to watch for that may key you into the more expensive of these accounts. If they include the word “if” or “until,” these are deferred interest accounts. Watch for advertisements that say “no interest if paid in 6 months” or “buy now and no interest until next year.”
If you choose to take advantage of one of these offers, be sure you know the length of the promotional period. Some are for six months, some for a year. Make sure you pay the account in full within that period. Err on the side of a shorter period. If that $1,000 sofa has a 12-month promotional period, base your payments on 11 months ($90.91 per month).
Know your interest rate. This is important with any type of credit account, but it is particularly important when dealing with a store card.
Have a plan. Know how much you need to pay each month to dispatch the debt and stick to the plan. Minimum payments aren’t going to work on this account. That sofa we were talking about when paid out at the minimum payment, will take you more than 10 years to pay it off — and will cost you 150 percent over the life of the loan.
As with all credit cards, make sure you know what all the terms and conditions are on the account before you use it.
Roxie Rodgers Dinstel is associate director of the Cooperative Extension Service, a part of the University of Alaska Fairbanks, working in cooperation with the U.S. Department of Agriculture. Questions or column requests can be e-mailed to her at firstname.lastname@example.org or by calling (907)474-7201.