By Andrew Housser
Every year, many Americans open a new credit card account or add to their existing credit card debt when they make big purchases with "buy now, pay later" arrangements. These consumers hope to pay off the bill before they pay high interest and fees -- but these purchases can be a gamble that consumers lose.
Some of these offers are advertised as "same as cash terms" or "no interest for six months." Officially, they are categorized as "deferred-interest offers," because the interest charges are deferred, or postponed until later. But all of them have the same intent: They lure consumers into making a large purchase that they might not be able to afford. While consumers may have the intention of paying off these purchases quickly, if they can't pay in time, the banks stand to make big gains in interest charges.
Last year, Congress passed legislation to rein in the credit card banks and protect consumers. The new laws are intended to make it easier for consumers to understand how much debt they have and how long it will take them to get out of debt. One part of the Credit CARD Act defines how credit card payments will be applied to credit card debt, including these deferred-interest plans. Here is what you should know about deferred-interest credit card payments under the new legislation.
1) Watch your statement
The CARD Act requires credit card lenders to clearly state on billing statements how long it will take to pay off a balance and how much you must pay every month to pay the whole bill in three years. Credit card lenders must communicate on the billing statement that to avoid interest on a deferred-interest purchase, you must pay the balance in full before the end date of the agreement.
2) Minimum payments are not enough to pay off the full balance
To find how much you must pay each month, divide the total balance due by the number of months before the end of the payment agreement. For example, if you purchased a refrigerator for $1,200 and the payment arrangement is "no interest for 12 months," the cost breaks down to $100 per month to repay the cost of the refrigerator before the interest is due. That's significantly more than the minimum payment, which might be $36 to $48 (based on 3 or 4 percent of balance).
3) If you don't repay in time, you pay full interest
A deferred-interest offer specifies an interest rate -- usually a high rate. You avoid interest only if you repay the balance by the specified date. However, if you do not pay off the purchase by that date, you will pay the full amount of interest on the total original purchase, not only on the remaining balance. On the example in No. 2, if you borrowed $1,200 at 18 percent interest and did not repay within 12 months, you would be charged more than $200 in interest, even if you still owed just $100.
4) Ignore "no payments"
The agreement might say "no interest, no payments for 12 months." But if you make no payments, the full balance will be due at the agreement's end. Unless you are scrupulous about saving up the full amount to repay the debt in time, you will be better off making monthly payments, even if they are not required.
5) Double check the due date
You might have in mind "12 months, no interest," but your actual repayment date might be a few weeks early. Call to check on the specific date so you don't miss the boat.
6) Special rules for "buy now, pay later"
The CARD Act includes special rules for paying off purchases made under deferred payment plans. If you have other balances on the same card as the deferred-interest agreement, you may be able to choose to have any extra payments (over the minimum payment) applied to the deferred-interest balance. Also, for two billing cycles prior to the end of the deferred-interest rate period, the credit card lender must apply your entire payment first to the deferred-interest balance before applying it to other balances.
The Credit CARD Act aims to help consumers understand the implications of deferred payment agreements. Ultimately, however, you are responsible for your own debt. Being an informed customer can help you make sure deferred-interest-rate deals work for you -- if you choose to gamble that you will be able to pay them before they cost you.
Credit card lenders must state on the billing statement that to avoid interest on a deferred-interest purchase, you must pay the full balance before the end date of the agreement. (©iStockphto.com/Lidija Tomic)
Andrew Housser is a co-founder and CEO of Bills.com, a free one-stop online portal where consumers can educate themselves about personal finance issues and compare financial products and services. He also is co-CEO of Freedom Financial Network, LLC providing comprehensive consumer credit advocacy and debt relief services. Housser holds a Master of Business Administration degree from Stanford University and Bachelor of Arts degree from Dartmouth College.
