Deferred interest: How to manage this tricky credit card feature

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In a Nutshell

Deferred interest is a common retail credit card feature that lets you make charges and avoid paying interest if the balance is paid in full before the special-financing period ends. The catch with many deferred interest promotions is that if you don’t pay off the full balance in time, you will have to pay that interest. Managing a deferred interest offer to your advantage requires attention to detail, and the discipline and ability to pay off your balance by the right date.
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Deferred interest is a common feature among store credit cards offered by retailers, but it can be a challenge to manage, making it an offer that isn’t for everyone.

For deferred interest offers, you won’t pay any interest on qualifying purchases during a special financing period. But if you don’t pay off the deferred interest balance in full before the offer period expires, you could be in for a nasty surprise. Instead of paying interest only on the remaining balance you have to pay, you’ll typically have to cover the full interest for that entire special-financing period, too.

Not surprisingly, managing this feature often requires a fair amount of focus and attention. We’ll provide some tips for how to navigate a deferred interest offer.

How deferred interest works

Deferred interest works like this: The credit card company keeps track of how much interest you would pay if there were no special intro period and if interest were applied as usual. If you pay off your balance within the listed time frame by the end of the intro period — and otherwise stick to the terms of the offer — then the deferred interest doesn’t come into play.

But if you stray from the terms of the special-financing offer or miss the deadline for when you have to pay off the balance, you might see your total balance suddenly balloon to include interest from when the offer began to the present.

How deferred interest offers get tricky

Deferred interest seems like a great deal on the surface. You get to divide up the hefty cost of that refrigerator or set of tires you need across, say, 12 months, without paying interest — making your purchase much more affordable.

The devil — and the risk of having to pay that deferred interest after all — is in the details. That’s why it’s crucial to go over the fine print of any offer very carefully. Here are some of the details you need to watch out for when reviewing deferred interest offers:

Payoff deadline

The most important term of a deferred interest offer is the time frame you have to pay what you owe. If you don’t pay off the balance in full before the deferred financing period ends, the full accrued interest that the lender was keeping tabs on can get applied to your account.

Late payments

You usually have to make at least your minimum payment on time to avoid the risk of losing the deferred interest benefit. Typically, if a payment is more than 60 days late, the deferred interest period may expire and leave you on the hook for the full interest accrued.

Minimum payments

Mixing additional purchases with a special-financing offer can make paying off the deferred interest balance more difficult. It also may increase the likelihood of the full deferred interest being applied to your account.

Credit card companies are required to first apply any monthly payment amount over your required minimum to the balances on your card with the highest interest rate. So any payment amount over your minimum monthly payment would be applied first to any nondeferred-interest balances that come with higher APRs.

For example, say your card only offers deferred interest financing on your first purchase. If you make any additional purchases on the card, those purchases will be subject to the higher regular purchase APR. So if you make a monthly payment in an amount greater than the minimum due, that extra amount would go toward your regular purchase balance rather than your deferred interest balance. This can leave you with a higher deferred interest balance to pay by the promotion deadline.

Take note: There is an exception to the rule of applying payments to higher APR balances. During the last two billing cycles of the special-financing period, any payment above the minimum is applied to the deferred interest balance.

How to avoid getting hit with deferred interest

Avoiding deferred interest is straightforward — you just have to follow through on the exact terms of the offer, including paying off your balance in full before the promotional period expires. Also make sure you make your minimum payments on time. And for the best chance of success, you should wait to make additional purchases on the card until after your special-financing balance has been paid off.

A simple calculation can show you how much you need to pay off each month to avoid having deferred interest applied to your account. Divide the balance you owe on your card by the number of billing cycles remaining before your deferred interest period expires. The result is the smallest amount you’d have to pay each billing cycle to pay the balance off in full before the promotion expires.

Consider paying the balance in full as soon as you can — avoid cutting it too close to the deadline. And, assuming it’s the only balance you’re carrying on the card, try to pay more than the minimum amount each month. This builds up some wiggle room in the payment schedule, putting you in a better position to handle unforeseen expenses that might pop up before the deferred interest deadline.

What to do if you can’t pay off your balance before deferred interest kicks in

Life happens. What if something comes up and you can’t pay off your full balance before the special-financing period expires?

If that happens, you might have a couple of options for managing repayment.

Balance transfers

If you’re going to miss the deferred interest deadline, you may want to consider transferring the remaining balance to another credit card via a balance transfer before then.

Depending on the terms of your card, you may be able to transfer your balance to another card, removing the balance you owe from the deferred interest card.

If you qualify, you might even be able to pay off the debt with a promotional 0% interest rate for a fixed period of time. But beware, these offers often include their own tricky features, including a balance transfer fee. So you’ll have to crunch the numbers and see if it’s the right move for you.

Personal loans

You could also consider other debt options to try to get a lower interest rate. Depending on your situation, a personal loan may offer more savings on interest than you’d pay with the typically high interest rates of a store credit card.

When evaluating a personal loan offer, check the interest rate and fees to see if they’re lower than what you’d pay when the deferred interest kicks in. Don’t forget to make sure you can afford the monthly payment, too.

Bottom line

A deferred interest offer, when used responsibly, can make a large purchase affordable. But it can be tricky to handle. If you don’t follow the exact terms of the offer, deferred interest can end up being a financial pitfall. Borrowers should take a close look at the terms and conditions of any offer to avoid potential missteps.

About the author: Lance Cothern is a freelance writer specializing in personal finance. His work has appeared on Business Insider, USA and his website, Lance holds a Bachelor of Business Administration in … Read more.