No-interest financing is tricky, especially if you have more than one balance on the card. Here’s how to avoid hefty costs for back interest
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Deferred interest deals — those “no-interest-for-X-months” promotions — can be appealing. But avoiding the interest is complicated — and the complications multiply when you have more than one deferred-interest balance on a credit card.
Quirky rules and balky card issuers can make it hard to pay off the balance that expires sooner, so it is important to know the ins and outs.
“Unfortunately, it’s not uncommon,” said Chi Chi Wu, staff attorney at the National Consumer Law Center. “We’ve seen examples of people having multiple [deferred interest] balances.”
Before we get to the problem with multiple balances, let’s review deferred interest deals. These are the promotions that promise no interest for six months, nine months or more. If you’re buying a big-ticket item or a costly medical procedure, avoiding interest can mean hundreds of dollars in savings. Appliance stores, dentists and even veterinarians hand out deferred-interest cards to help customers manage large expenses.
But the savings have a catch: The interest is only deferred, not gone for good. You must pay off the purchase by the end of the promotion to avoid the built-up interest. Making just the minimum payments won’t do it. You have to plan to make payments large enough to pay off the entire purchase.
If you don’t, watch out — interest that built up quietly over six, nine or more months all comes due. Making a late payment can also trigger the interest. In complaints filed with federal regulators, users who make a misstep tell of big surprise interest charges — sometimes over $1,000 — landing on their bills.
Problems with payments
If that’s not tricky enough, the risk of running afoul of the rules runs even higher when you have two purchases with different expiration dates.
Should be easy, you say. Just figure the monthly payments you need to make, pay off the balance that expires sooner, then pay down the other one.
But that’s easier said than done. Under credit card rules, you may not be able to earmark your payments to the first balance. It sounds hard to believe, but card issuers don’t have to follow your instructions about how to apply your payments.
One Connecticut consumer, who had three promotional balances on a Wells Fargo card, found this out the hard way.
“I was told they had no way of applying the excess money to any one balance,” said the consumer, who was not identified, in a complaint to the U.S. Consumer Financial Protection Bureau. “I mistakenly assumed they would add my extra payments to the promotional balance ending soonest.” Instead, “The majority of the money is being applied to the furthest-out end date.”
According to the complaint, the bank’s customer service agent said there was nothing he could do, though he “knew how frustrating this must be.” Wells Fargo closed the complaint with an explanation, which the consumer disputed.
To see how this works — or doesn’t work — imagine buying a $1,200 fridge and an $850 patio set with a store card. The fridge balance comes due in nine months, the patio furniture in 18 months. The first month, you make a payment of $200 above the minimum, expecting to bring the fridge balance down to $1000. Instead, the card issuer subtracts the $200 from the patio debt. The fridge balance stays at $1,200.
Rules let banks decide
Some banks blame the Credit Card ACT for restricting how they allocate payments. Under the 2009 law, card issuers are supposed to apply payments above the minimum to the balance with the highest interest rate first. There’s a limited exception for deferred interest balances. The exception requires payments to go to a deferred interest balance during the final two months of the promotional period.
“I don’t think the credit card company has a choice — the CARD Act is quite specific,” said Nessa Feddis, senior vice president of the American Bankers Association. Credit card agreements typically say the card issuer follows the law when it comes to allocation of payments.
But blaming the consumer protection law for harming consumers is a smokescreen, Wu of the consumer law center said. “The consumer has the choice of directing (the payment) — it’s in the regulation,” she said.
Regulations implementing the CARD Act say that, in the case of deferred interest deals, card issuers can let consumers choose which balance to pay down first — but they are not obligated to.
Until the last two months of the deferred interest period, “issuers are permitted (but not required) to allocate excess payments in the manner requested by the consumer,” states the Federal Reserve’s compliance handbook. During the last two months, the CARD Act’s requirement to pay down the expiring balance kicks in.
Besides, two purchases on the same card will usually have the same interest rate, so the CARD Act’s requirement about applying payments to the higher-interest balance does not come into play.
Finding out policy can be difficult
So it is up to card issuers just how easy or hard it will be for you to pay off a deferred interest balance. But getting them to explain their policies can be difficult.
Wells Fargo said its policy was driven by the CARD Act, but did not respond to specific questions about how it allocates payments on deferred interest balances.
Comenity Bank, a major issuer of store cards, where deferred interest deals are common, also said it followed legal requirements, without explaining its policy.
Synchrony Bank, formerly GE Capital, a major store card issuer and the company behind the CareCredit medical card, did not respond to questions.
Capital One allocates payments to the highest rate balance first and does not allocate payments according to the customer’s request, a company spokeswoman said.
Citi, however, said it does accept cardholder requests to allocate payments on deferred interest balances, as set out in Federal Reserve regulations. Citi is a big issuer of store cards, where deferred interest promotions are common.
Chase said it does not have cards that offer deferred interest promotions.
There are steps you can take to reduce your risk of running afoul of deferred interest problems, even with multiple balances. If you have multiple balances, and the bank won’t allocate payments as you ask, you could make minimum payments until the final two months of the intro period, while socking away the necessary amount to pay off the promotional balance. Then during the last two months, make big payments to wipe out the expiring balance. The card issuer must by law apply your payments to the expiring balance.
Sounds tricky? It is. Want to avoid the deferred interest trap for certain? Don’t opt for a no-interest deal in the first place, Wu recommends.
“Our policy is simple — they should be banned,” she said. Banks can only profit on the complex deals when consumers pay interest they were trying to avoid, she said. “Nobody thinks they’re the person who is going to wind up paying.”
See related: How to manage different balances on one card