When 0 Doesn't Equal 0: Are You Aware of this Retailer Interest Trick?

The cost of a happy holiday season all too often seems to be some post-New Year’s pain, as overspending catches up with us and expensive interest charges start rolling in. In the past five years, we’ve spent a total of $3.2 trillion on holiday shopping and racked up $238.8 billion in credit card debt during the fourth quarter.

A lot of times, people plan for a bit of post-holiday debt. But other times, would-be holiday savings can turn into big surprise bills due to a dangerous feature of most retailer financing plans called deferred interest. Deferred interest is when a retailer advertises a low introductory APR – often 0% – and gives a consumer the chance to pay for their purchases without interest, only to slam them with interest charges (as if the regular APR had been in place from the start) if they are unable to do so.

Although 85% of 0% APR store cards have deferred interest, fewer than 2 in 10 people even know what it is. So consumers who are unfamiliar with the term are not alone, but most shoppers are vulnerable to getting burned by this trick. One big reason for that is major retailers don’t seem to care about being more transparent. They don’t tend to list what the regular, deferred interest rate will be in large enough font or in a prominent location. And their average transparency scores are unchanged dating back to 2015, according to WalletHub’s research.

“Marketers and retailers are always trying to make money. Some will exploit consumers’ weaknesses and vulnerabilities in order to do so,” said Kelly Goldsmith, an assistant professor in the Kellogg School of Management at Northwestern University. “This has probably been true since the dawn of commerce, and it will probably never change.”

But perhaps unsurprisingly, consumers who learn what deferred interest is, how it works and how common it is aren’t happy about the situation and want change. Nearly 8 in 10 people say deferred interest is “unfair,” while more than 6 in 10 people go as far as to say it should be illegal. Indeed, it is fair to wonder why regulators would allow this type of “gotcha” pricing to persist, especially after so many other financing tricks were eliminated in the aftermath of the Great Recession.

“I think it should remain legal because it can be a good deal for all parties involved, but I think it should be highly regulated,” said Rick Scott, associate professor of finance at Saint Leo University. “Borrowers should have to sign a short, well-worded, and easy to understand disclosure that they understand that the 0% financing is temporary and that they should be on the hook for substantial interest charges if they do not pay off the financing by the end of the teaser period.”

In the meantime, there are plenty of other ways to prevent deferred interest from costing you. You could take advantage of a 0% retailer financing offer, despite the risks posed by deferred interest, as long as you’re prepared to pay your bill in full by the deadline. You could also get a 0% credit card on the Visa, Mastercard, American Express or Discover network, which won’t have deferred interest.

Or, you could strive to pay for your holiday purchases in full within a single billing period. Rewards can really help with that. For example, the average store credit card with a first-purchase discount gives 29% off. And several general-purpose credit cards have sign-up bonuses of $500+ for spending a few thousand dollars within a few months of opening an account.

As long as you have a plan and stick to it, there’s no reason your holiday cheer has to come to an end come 2019. Not even deferred interest needs to spoil the fun.

“The internet age has made it easier than ever before for consumers to educate themselves about the various costs and benefits associated with promotional offers, like deferred interest financing,” Northwestern’s Goldsmith said. “Consumers should take advantage of this amazing advantage they now have and use these resources to inform their decision making.”

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