You’ve always wanted a new living room set, and the huge glaring sign helps you to say yes to your big splurge for the year. The sign in the store reads, “No Money Down and No Payments for 12, 24 or 36 Months”. Evidently, the more you spend the longer the promotional period. Sounds great right? Well, it depends on how you handle it.
Let’s explore the most popular financial traps to help you decide if you’ll bring home the spoils or get caught in the hunter’s trap.
- Zero percent APR offers for 12-21 months on purchases and balance transfers – You’re likely to find these deals with credit card companies. Balance transfers often come with a transaction fee 2-5 percent of the balance transferred. A minimum payment is required each month; at the end of the promotional period, you’ll see an increase in the interest rate roughly 16% on average. Any outstanding balance or new purchases will be subject to these rates.
- Twelve, twenty-four, and thirty-six months same-as-cash financing is a bit menacing. This type of financing is normally found at retail stores. Credit is often granted by outside sub-prime lenders and you may receive their credit card. The salient difference is that you must pay the balance in full within the promotional period or pay the price—literally. If there is a remaining balance you are subjected to predatory type interest rates assessed on the original balance, retroactive from the date of the purchase. This is true even if you owe just $5 at the end of the period. The deceptive minimum payment amount is displayed in the Schumer box on your statement along with the amount of deferred interest you will owe if there is an outstanding balance. Merchants are waiting to cash in on any missed-step you may make. Missing a payment or paying late can also void the contract and immediately trigger the retroactive interest.
- Ex. $4,000 Purchase – after the 36 month promotional period of making the minimum 2% payment, the balance is $1,932.85—the deferred interest is $1,866.27 @ 21.9%. Your outstanding balance is now $3,799.12; that’s approximately 95 percent of what you originally owed. Now you are trapped paying interest on interest.
- No interest, no payments – it works the same as the same-as-cash deal, except consumers may be lulled into the false belief that interest doesn’t accrue until after the promotional period ends, when in fact, it’s often deferred—read the contract. If you don’t make any payments during this time, you will owe 100% of your original balance, plus accrued interest.
- Ex. $4,000 Purchase – after 36 months, you will owe $4,000 plus accrued interest of $2,638. The new balance of $6,638.00 will carry an expensive interest rate, over 20 percent. You will pay interest on interest.
To avoid the inherent risk of these deals, the best option is to use a good credit card—Citi Simplicity Card, voted by nerdwalletas one of the best credit cards of 2015—free monthly fico scores, no APR penalty rate, no annual fees, no late payment fee, interest rates 12-22% after a 21 month interest free period. You’ll need good credit to acquire this card.
If you take the risk, it can pay off big for you if you are buying something you need or want and can make the full payment timely. Who would pass up a deal to borrow money for free? You just need to understand the game and play it well. Obviously there are millions of consumers losing at this game. Research shows that over 70% or consumers of same-as-cash deals don’t pay the balance in full by the end of the promotional period. Best Buy and Home Depot, two juggernaut retailers, offer this deal almost daily.
To win at this game:
- Make sure the price of the item is not padded. Don’t let the free interest period invalidate your research and negotiation rights.
- Read and understand the terms of the agreement
- Divide the balance by the promotional period, don’t depend on the Schumer box suggested minimum payment, it doesn’t reflect full payment within the promotion period.
- Pay on time; if you don’t pay your other bills on time, don’t attempt to execute this deal, it will cost you so much more.
- Always pay the balance in full 1-2 months before the interest free period ends. Retailers are sneaky, manipulating the time you receive your final statement, sometimes arriving or requiring your last payment after the promotional period ends.
- Maintain an emergency fund in case life’s situations happen, it will allow you to continue payments uninterrupted. Those that win at this game already have the money to pay for the item, earning interest on their money while utilizing free money.
- If you receive a credit card as part of the deal, don’t use it for future purchases. These cards are usually from sub-prime lenders. Having sub-prime creditors can lower your credit score.
For more Personal Financial Tips read my book: Financial Freedom A Guide For Personal Finances