Instant credit: Convenience often comes at a price

7 things to do before applying for on-the-spot, in-store credit

Instant credit: Everything you should know before applying

You’re sitting at the garage with a disabled car and an estimate for repairs that’s higher than your bank balance.

No sweat, the mechanic says. You can get a payment plan and be on your way.

Welcome to the world of instant credit.

The setting could just as easily be a doctor’s office, dental clinic or veterinary hospital. And while that credit line could help you face an unexpected – and unexpectedly large – expense on the spot, it also could make the bill even larger if it comes in the form of a credit line with a painfully high interest rate.

If you find yourself in a bind and are considering applying for instant credit, here are seven things you need to know first:

On-the-spot credit: Seven things to know before applying

  1. A third-party lender, not your neighborhood professional, is likely issuing the credit.
  2. Credit card versus installment loan: Why the difference matters.
  3. Convenience could come with a large price tag.
  4. You could be tempted to sign without investigating terms.
  5. The credit could include deferred interest.
  6. Alternative credit options abound.
  7. You can defuse the “time” bomb.

1. Your neighborhood professional is probably not issuing the credit.

Doctors’ and dentists’ offices, veterinary clinics, garages and other service providers contract with lenders to offer instant credit products on-site. But, “the place managing the billing office is not the place offering the credit,” says Bruce McClary, spokesman for the National Foundation for Credit Counseling.

Typically, it’s a third-party bank or finance company.

So, the garage or doctor’s office “may not have all of the financial details you need,” says Ruth Susswein, deputy director of national priorities for Consumer Action. “Sometimes it’s very, very hard to get details.”

To find the actual lender behind the loan, read the fine print on any materials you are given. You can also do a quick search of that lender on your phone to see what kind of experiences other borrowers have had, says Eric M. Eisenstein, director of business analytics for Temple University’s Fox School of Business.

2. Credit card versus installment loan: Why the difference matters

As you read the credit offer’s materials, determine whether this is a credit card or an installment loan. The difference could make or break the deal.

  • An installment loan, similar to a car loan, requires equal, periodic payments to be made for a defined period of time.
  • Opening a credit card that will max out immediately could hurt your credit score as it could affect your credit utilization ratio.

An installment loan’s utilization for the same amount is calculated differently, and plays a relatively minor part in credit-scoring calculations.

3. Convenience could come with a large price tag.

“I always put it in the context of the convenience store versus the grocery store,” says McClary. “You pay for the convenience.”

When Consumer Action studied medical credit cards in 2014, the group discovered interest rates from 0 to 29 percent.

But because you may not learn the APR until after you apply, “you may have trouble finding out what the rate really is,” Susswein adds.

The average APR for “instant approval” credit cards currently stands at 18.74 percent, almost 2.5 percent higher than the national average, according to CreditCards.com's weekly rate report.

Some lenders also charge origination fees that can range between 1 and 8 percent, and some may eliminate any promotional rate if a single payment is made late.

What you need to ask: Exactly how much will this cost, both monthly and in total? What are all the fees? If there’s a promotional rate, how long does it last and what happens to your balance when that rate ends? What happens if I miss a payment? And what could trigger a rate hike?

"I always put it in the context of the convenience store versus the grocery store. You pay for the convenience."

4. You could be tempted to sign without investigating terms.

“It’s presented in a moment of urgency when you’re not likely to think the decision through carefully,” says McClary. “There’s an emotional element that comes into play.”

Since the provider isn’t issuing the credit, they likely won’t know details on credit requirements and terms. That means you’re left to call the lender’s customer service line or use the search engine on your phone.

If the instant credit option is a credit card, you’re entitled to see a Schumer Box, which should lay out all the terms, fees and penalties.

“The No. 1 thing I would be looking at is, do you feel you’re doing this because you can’t afford [the service]?” says Eisenstein. “Or are you doing this because you feel they’re making a good offer?”

If you can’t afford whatever it is, “be very careful,” he says.

Bottom line: “You should never sign anything without having read and understood the terms,” says Eisenstein.

5. The credit could include deferred interest.

Some of the instant credit products offer 0 percent interest introductory periods – often for anywhere from six months to two years.

Sounds appealing, but what you really should ask is: Does the offer come with deferred interest?

Intro offers with deferred interest work differently from the introductory interest rate on your favorite rewards card.

If you don’t pay the entire balance during the 0-interest intro period, you’ll pay interest retroactively on the entire balance.

That means the issuer will assess a (non-introductory) rate to your formerly free introductory period, calculate the interest charges and add that amount to your balance.

CareCredit, a popular credit card option to pay for out-of-pocket medical expenses, for example, offers 0-percent intro promotions of six, 12, 18 and 24 months, but currently charges a deferred interest of 26.99 percent.

The only way 0-percent introductory rates are truly free with a deferred interest card is if you pay off the entire bill during the introductory period or transfer the balance to another loan or card before the end of that period. Even if you transfer the balance to another card, balance transfer fees, which typically can be 3 to 5 percent of the transferred amount, might apply.

Pro tip: Do the math before signing up. If you won’t be able to pay off the full amount within the introductory period, look for a more affordable alternative in the first place.

"[On-the-spot credit is] presented in a moment of urgency when you’re not likely to think the decision through carefully. There’s an emotional element that comes into play."

6. Alternative credit options are out there.

You may have more choices than you realize in the heat of the moment. Some options might include:

  • A credit card with a 0 percent introductory rate.
    This saves you all interest costs if you can pay off your debt during those free, introductory months, says McClary. Cheaper than deferred interest, but – like any maxed-out card – a charged-up 0 percent interest card is not great for your credit. (As a backup plan for emergencies, it is also smart to keep a 0-interest card in your back pocket – it can buy you time to shop for more affordable options.)
  • Use a credit card you already have.
    You could pay a down payment or the entire bill with a card in your wallet or purse. Plenty of cash back and rewards cards come loaded with 0-percent intro offers of up to 15 months. If your favorite card won’t cover the full bill, you could use a couple of cards or ask your card issuer for a credit line increase.

  • A payment plan with the actual provider.
    Ask the service provider’s representative if you could pay a portion of the bill now and a certain amount each month until the bill is paid. “Ask if they can split up the billing, so you don’t have to go into debt,” says McClary.
  • Have the work done in stages.
    Can you get the procedure done over time, paying as you go? Obviously, this is more workable for some things than others, but any time you’re getting a multistep procedure, incremental billing is smart. Make arrangements with the provider to be billed as the work is done, says Susswein. And get that agreement in writing, she says.
  • Consider taking out a personal loan.
    Depending on the amount you need and your credit score, you might be able to get a loan from your bank, credit union or card issuer. Some employers also make loans to help out when a financial crisis hits.
  • Seek a home equity loan or line of credit.
    Obviously, a home equity loan is an option only if you own a home. The downside is that it can take a few days to shop and close on a loan – especially if you want to make a smart choice. It could also be a solution you use in combination with something else (such as an arrangement with the service provider or using your credit cards).

7. You can defuse the ‘time’ bomb.

No one thinks clearly when there’s a stopwatch (real or imagined) ticking in the background (as watching a game show will show). “We know that time pressure is not good for decision-making, especially for things that are complex,” says Eisenstein.

But a financial emergency “quite frequently is not as dire as people make it out to be,” he says.

Instead of seeing this as “all or nothing,” step back and examine the alternatives:

  • Need a day or two to evaluate this loan and shop your options?
  • What stopgaps could buy you that time?
  • If the car is going to be in the shop, could you carpool, call a ride-sharing service, rent a car or take the bus for a couple of days? What’s the price tag on that?

By taking a step back and buying yourself time to weigh your options, you’re “reframing problems so that they more accurately match the situation,” says Eisenstein.

See related: Medical credit cards: Treatment today, payment headaches tomorrow, Deferred-interest, 0-percent financing “deals” costly for many, How to avoid big costs of deferred-interest financing deals


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Updated: 08-20-2018