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Don't confuse introductory rate, deferred-interest deals

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Let's Talk Credit
Let's Talk Credit columnist Jane E. McNamara
Jane E. McNamara is president and chief executive officer of GreenPath Debt Solutions, a nationwide, not-for-profit, providing financial literacy through consumer education and counseling for more than 50 years. For financial literacy tips and assistance visit GreenPath on Facebook or YouTube.
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Question for the CreditCards.com expert Dear Let's Talk Credit,
I have a credit card that had a 0 percent introductory interest rate for 12 months. If at the end of the 12 months I still have a balance, how do they charge interest? Is it on the remaining balance only, or all charges that occurred in that 12-month period? -- Mike 

Answer for the CreditCards.com expert Dear Mike,
I'm glad you asked this question. Retailers sometimes offer deferred-interest rate credit products that can be confused with introductory interest rate offers, such as the one you have.

Let's start with your 0 percent introductory interest rate. These offers typically apply to purchases and/or transferred balances. Either way, you are charged 0 percent interest on the balance that applies, for as long as the introductory period lasts (often between six and 18 months). This should be clearly spelled out in the card agreement, as well as the interest rate you will pay after the introductory period ends.

Most credit cards tie the interest rate charged on credit card accounts to the prime rate. Your interest rate will likely vary, based on your creditworthiness and the amount of the prime rate at the end of the introductory period.

You would be charged the new, higher interest rate on any balance that remains on the card at the time the rate changes. Say you charged a total of $5,000 on the card during the 0 percent interest rate period and have a $1,000 balance remaining when your introductory rate ends. You would be charged the higher interest rate only on the remaining $1,000 balance, not the other $4,000 that you already paid off.

Deferred interest rate card offers work differently. These agreements offer 0 percent interest on purchases for a specified time (usually 6 to 18 months), but the entire balance must be paid in full before the time expires. Otherwise, you have to pay interest on the full purchase amount. For example, you might purchase a new television for $800 at a retail store using its credit card offer of no interest for 18 months, if paid in full. During the 18-month period you make payments on the account that total $600, leaving a $200 balance.

Since you still have a balance when the deferred-interest rate period ends, you will be charged interest (at the rate spelled out in the agreement) from the date of purchase on the full amount of $800. At an interest rate of 18 percent, that would be $216 for interest payments. In the example above, your balance would increase from $200 to $416, on which you would be charged 18 percent interest each month until the balance is paid in full.

As you can see, it is not a good idea to confuse a 0 percent introductory rate and a 0 percent deferred-interest rate credit product.

Let's keep talking!

See related: Many pay an unexpected price on deferred-interest deals

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Published: January 30, 2014


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