It’s called deferred interest, and it can get you in a lot of trouble later.
When you’re shopping, whether it’s on Black Friday or Cyber Monday or during a typical week, you’re probably always keeping an eye out for the best deals. Sure, some stores offer great sales on a recurring basis, but when there’s no sale running and you really want a good deal, signing up for a store credit card can seem like a pretty sweet option.
Some store credit cards offer sign-up deals, such as a certain percentage off your first purchase with the card; others offer ongoing rewards at the store and affiliated stores, such as saving 5 or 10 percent on every purchase with the card. (Those small savings can really add up, especially if it’s a store you visit often.)
Plus, if you’re new to credit cards, a store card can be a good option in general: According to a new analysis from personal finance site WalletHub, all store credit cards included in the analysis have $0 annual fees, and almost 30 percent of them offer ongoing rewards, mainly through a points system. Among store credit cards offering discounts as rewards, the average sign-up reward is more than 25 percent off your first purchase.
With options like that—compared to the sometimes high annual fees and minimal or less tangible rewards among standard credit cards—signing up for a store credit card seems like an easy decision, especially if you have a big purchase in mind and need a little time to pay for it.
One of the top perks of a store credit card is an introductory interest rate. If you aren’t able to pay for a purchase in full (or pay off your card balance) in the first month or two, the card won’t charge you interest on it, so you save money in the end. Your standard credit card would charge you interest on your balance until you’re able to pay it off, so you’d end up paying more for the purchase in the end. Just read the fine print before signing up: According to WalletHub’s analysis, 43 percent of store credit cards offer a 0 percent intro APR on purchases, but 88 percent of those cards use deferred interest.
Deferred interest is a feature in which credit cards offer no or low interest rates as an incentive to sign up for the card. These cards will then apply the regular APR retroactively to the original purchase amount, as if the low introductory rate had never existed, if cardholders miss a monthly payment or don’t repay the full balance within the introductory period.
Often hidden in the fine print, deferred interest can trick cardholders into signing up for a credit card to take advantage of a 0 percent interest rate, and then getting hit with a much higher rate that makes their large purchase (possibly a big-ticket Christmas gift, purchased with the intent of paying it off gradually at a zero interest rate) even more expensive. Worst of all, deferred interest often kicks in once the introductory period has come to an end, months after the purchase; that’s a nasty surprise, especially if paying off the purchase alone is already a struggle.
According to WalletHub’s survey on deferred interest, 82 percent of people don’t know how deferred interest works, which makes the practice even more dangerous.
“Deferred interest should not be legal,” says WalletHub CEO Odysseas Papadimitriou in a statement accompanying the report. “It is a shady, counterintuitive practice that depends on predatory surprise tactics to turn a profit.”
Unfortunately, this shady practice doesn’t seem to be going anywhere, and it’s used by top store credit cards, including those at Amazon, Apple, and Pottery Barn, according to WalletHub’s analysis.
When a cardholder is aware of it, deferred interest doesn’t pose a serious threat: If the cardholder pays off the initial purchase in full within the introductory period, deferred interest doesn’t kick in. If that’s not possible, though, it can mean an even larger financial burden later on. As with most credit cards, if you’re not able to pay off a monthly balance in full (or before the introductory period ends), a store credit card may not be the right move, even if it does mean saving 25 percent on your Christmas shopping.
If you’re trying to figure out when to use a credit card and you don’t fully understand APRs, annual fees, and the consequences of not paying your balance off in full every month, you might be better off using your debit card (or cash) for most purchases. Figuring out how to get out of credit card debt isn’t easy, but it is easy to let that debt pile up, especially if you get stuck with deferred interest or another unpleasant credit card feature you don’t fully understand.
Considering credit card debt makes reaching other financial milestones—such as establishing an emergency fund—nearly impossible, it may be better to play it safe than sorry. Think about it this way: Another credit card just means you need to learn how to clean credit cards even more desperately.