This post is by Odysseas Papadimitriou, CEO of Card Hub.
After all the pushing, shoving, coffee drinking and waiting in interminable lines on Black Friday to score savings and cross some items off your holiday shopping list, were you convinced to take a store up on its offer for 0% financing?
It’s understandable if you were. The early wake-up call, aggressive crowds and Tryptophan-induced weariness can be disorienting, and the holidays are just plain expensive. The average holiday shopper is expected to shell out about $800 this year, according to multiple surveys, which is more than the outlay that helped U.S. consumers rack up $44.3 billion in credit card debt during the fourth quarter of last year.
The key thing you need to know is that there’s a big risk associated with most retailers’ financing plans, even if 0% is on the table for a few months.
More than 60% of the retailers that offer financing use a type of payment plan known as deferred interest. Deferred interest is dangerous because, if you don’t pay off your entire balance during the initial low-interest period, regular rates will apply retroactively as if the intro rate never existed. In other words, you might think you’re avoiding finance charges, but if you slip up in the slightest, you’ll be faced with costs inflated by 2,700% or more.
It also tends to be difficult to determine whether a financing offer uses deferred interest or not because the retailers themselves are fairly tight-lipped about it, store employees aren’t trained to provide detailed financial information, and the specifics about a given offer are usually buried in its fine print.
Now that we’ve established why you aren’t to blame if you signed up for deferred interest financing, let’s talk about how to get out of it. (If you haven’t made that mistake, the solution is simple: Stay away from retailer-specific financing).
The answer, oddly enough, lies with another 0% financing arrangement. You should transfer the balance on your deferred interest account to a general-purpose credit card like the Slate from Chase, which offers a traditional 0% rate on transferred debt for 15 months and charges neither a balance transfer fee nor an annual fee. You just need excellent credit to qualify, which means roughly 50% of consumers are eligible. While you should strive to pay down what you owe within the 15-month window in order to minimize costs, failing to do so won’t rewrite history to make it seem as if the 0% intro term never happened.
If you haven’t already gotten mixed up with deferred interest, you’ll want to also consider the Citi Diamond Preferred Card, which is a better option for new purchases, given that it offers 0% for 18 months (its 3% balance transfer fee makes it inferior to the Slate Card for people with existing debt). Either way, you stand to save hundreds.
Odysseas Papadimitriou is CEO of Card Hub, a leading website that conducts research on the credit card industry and helps consumers find the best credit cards, prepaid cards and gift cards for their needs.
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