When you want to make a big purchase – say, a flat-screen TV for your home or dental work for your son – it’s tempting to take advantage of one of the popular credit card promotions that promise 0% interest for a set period of time.  But what many people don’t know is that these cards have a significant drawback: If you don’t pay off the entire balance within the promo time, you could wind up owing retroactive interest – typically at a rate of 24% or even higher – for the whole period. Adding insult to injury, you could even owe interest on the amount you have already paid off. Ka-ching!

So-called deferred-interest credit cards have drawn increasing government scrutiny as Americans’ use of them expanded by nearly 21% between 2010 and 2013. There have been crackdowns on providers of the cards in recent years. No new cases have been announced by the Consumer Financial Protection Bureau (CFPB), which investigates predatory lending practices post-financial crisis; however, the CFPB is continuing to look into these financial products, reports the New York Times.

Here is a look at how the cards work and what you can do to avoid getting trapped by one.

Who’s Offering the Cards?

Many retailers pitch these zero-interest credit cards to consumers for big-ticket buys like furniture, appliances, electronics and jewelry. Healthcare providers also offer the cards for medical and dental treatments that aren’t covered by health insurance. (See Pros & Cons of Healthcare Credit Cards.) The enticement is that there is no interest on a purchase (or treatment) for a specified period, usually 6 to 12 months, which can help make a larger purchase more affordable for many consumers.

A December 2015 CardHub study of 49 major retailers found that 73% offer financing on purchases, and of those, 47% – including big names like JCPenney, Sears, Walmart, The Home Depot, Best Buy, Staples and ToysRUs – have a deferred interest plan. Online, PayPal does too; it’s called PayPal Credit (formerly “Bill Me Later”). Citibank and Synchrony Bank (formerly GE Capital) are the two main banks behind the store-branded cards. 

Settlements in Favor of Consumers

The Consumer Financial Protection Bureau has already brought judgments against Synchrony, PayPal and Springstone Financial. In December 2013, Synchrony was ordered to pay back $34.1 million to enrollees in its CareCredit medical credit card plan due, in part, to a lack of clear disclosures. (Earlier that year, Synchrony entered into a settlement agreement  with the New York attorney general for similar reasons.) In May 2015 PayPal was fined $10 million and ordered to pay back $15 million to consumers who used its Bill Me Later plan. And just last August, Springstone refunded $700,000 to consumers who had used its deferred-interest dental card. 

How You Can Get Trapped 

“A debt time bomb” is how zero-interest cards are characterized in a December 2015 report from the National Consumer Law Center (NCLC). “The complexity of these plans,” the report notes, “makes it almost impossible to formulate a short, simple disclosure necessary to prevent consumers from being deceived.”

The NCLC report is filled with consumer complaints about the cards. One young lawyer, for example, purchased a $6,000 diamond engagement ring for his fiancée with a one-year deferred-interest plan offered by a New England chain jeweler. The store staff told him that interest would be charged after the year was up and warned him the rate was high, but neglected to tell him that the interest would be retroactive. When the year was up, he had paid off $5,000 of the debt, only to discover that $1,760 in deferred interest had been retroactively charged to his account (at a rate of 29.99%) – an amount that exceeded the $1,000 he still owed on the balance.

There are additional pitfalls: After making a zero-interest purchase, if you use the card again, this time for a nonpromotional purchase, it’s virtually impossible to allocate your payments to the zero-interest item. This can make it exceedingly difficult to pay off that item before the promo period expires. If you don’t manage to pay it off, and if you can’t then pay off the outstanding balance (accrued interest plus the remaining balance on the item) all at once, you are forced to pay interest on the back interest.

For these and other reasons, the National Consumer Law Center has recommended that the Consumer Financial Protection Bureau ban deferred-interest products altogether.

How to Protect Yourself 

The simplest way to protect yourself is to avoid deferred-interest cards altogether. If you do use one for a purchase, however, here’s how to ensure that you don’t unwittingly take on extra debt:

  • Read the fine print. Make sure you get a copy of the agreement and check to see if interest is charged on the initial, full price or on whatever balance remains when the promo period expires.
  • Carefully consider the payment plan and make sure your budget can cover the monthly payment. The CFPB found that those with subprime credit scores are the likeliest not to pay off the full debt within the zero-interest time frame. 
  • Pay more than the minimum due. Often, that amount is not enough to pay off the purchase before the deferred-interest period expires.
  • Be sure you know and keep track of the payoff date, especially if it doesn’t coincide with the payment due date for that month.
  • Pay off the full amount within the designated time frame – especially if retroactive interest will otherwise be charged.

The Bottom Line

For consumers with good credit who manage their money well, deferred-interest credit cards can be an attractive way to pay for a pricey item like furniture or appliances over time without incurring any interest. The caveat: You must pay off the full debt before the zero-interest period expires or you could be faced with a hefty bill.

For more on wise credit card use, see: Six Major Credit Card Mistakes and Understanding Credit Card Interest.




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