Don't confuse introductory rate, deferred-interest deals
Let's Talk Credit
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
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
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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