Deferred Interest vs. Zero APR Credit Cards: Know the Difference

Editorial Note:

A lender’s “interest-free financing” credit card sounds like a tempting offer. It might be worded as “0% APR” and “no interest if paid in full” over a given time. The promise of saving money with a credit card is powerful. If you could eliminate paying interest, why not get the card?

Before you add it to your wallet, you should read the fine print. Some of these no-interest credit cards are actually deferred interest cards dressed up in great marketing. Confusing the two can be a costly mistake.

Deferred Interest vs. 0% APR

Deferred interest cards (like store cards or medical credit cards) don’t discard the interest charges on your purchase. Instead, interest is computed, accumulated, applied at a later date. If you zero out your balance before the promotional period ends, there will be no interest applied to your account. The problem arises if you still have a balance by the time the deferment ends. A balance of even a few cents will trigger the deferred interest charge activation on your account. To be clear, this is not the interest charge on the balance that remains. This is the charges generated over the entire deferment phase. According to the Consumer Financial Protection Bureau (CFPB), the average retail APR is about 24%. This can easily make your interest charges hundreds or thousands of dollars.

A true 0% APR card from your bank or credit card company works differently. The card will not calculate and accrue interest until after the promotional time is complete. You must still meet the card agreement terms during the promotional period, otherwise, your regular APR applies. When the 0% APR phase ends, your non-promotional rate applies to the current balance only.

Deferred Interest Traps

Credit Card Interest

Here are some other ways that deferred interest cards can trip you up.

Payoff dates and due dates do not match

You may assume that your payoff deadline date matches the end of your billing cycle for that month. Deferred card issuers aren’t required to make your payoff deadline and billing cycle end date coincide.

For example, you are paying off a $3000 purchase on your deferred payment credit card. The promotion ends May 15th, but your bill is due May 25th. Paying your balance after the 15th will trigger the interest charges. This is despite your intention to pay your bill in full between May 16th and May 25th. You can end up paying hundreds of dollars in interest charges the next billing cycle from the $3000 expense. A true 0% APR card will only charge you interest on the unpaid balance at the end of the promotion.

Your payment may be diverted to other balances

Deferred interest credit cards may have multiple balances linked to the card. Two of these are the deferred interest balance and regular APR balance. When you make your credit card payments, you may think the payment is going towards your deferred interest balance. Instead, your credit card company applies the bulk of your payment to new balances.

You may think that’s not fair, but the card company is following federal credit card regulations. The law says any payments over the minimum must be applied to the balance with the highest interest rate first. This means that the new purchase balance at the regular APR will be paid off first. After that, any remaining funds will be used to pay off the deferred interest balance.

Non-promotional rates are notoriously high

According to the CFPB report from 2017, the average non-promotional deferred interest card APR is 24%, regardless of credit score. This is expensive after paying 0% APR the previous month. For cards with long promotional periods, the retroactive interest costs can equal about one half of the original purchase.

What To Do If You Already Have a Deferred Interest Card?

If you already have one of these cards in your wallet, you can take the following steps to mitigate your risk.

  • Eliminate your balance early. Aim to completely pay off your balance at least a full month before the deferred phase ends. If you’re not sure when this is, reread your statement disclosure, or contact your card issuer.
  • Freeze your card usage until the balance is paid off. Don’t make new charges on the card to avoid multiple balances. You want your payment to go to the deferred balance.
  • Choose paper statement. Most people find it easier to remember to pay bills on paper than e-bills.

You’d Better Choose a Balance Transfer Card

Balance Transfer Credit Cards

Deferred interest credit cards are no-interest cards, with lots of strings attached. If you are considering paying down debt, why not get a 0% balance transfer APR card? It’s less costly, more straightforward to use.

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