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What is deferred interest?

Many retail store cards offer 0 percent APR deals that charge back interest on your entire purchase if you don't pay it off over a set time period

Summary

Deferred interest plans are often advertised in retail stores as charging “no interest until” a certain date. After that date, however, if you have any remaining balance the interest that has been accruing on the original purchase amount since day one is charged to the account.

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You may be offered deferred interest if you use a store credit card or retail store financing to make a large purchase. These promotions postpone — not eliminate — accumulated interest on credit card purchases for a set time period. If you manage it well, deferred interest can save you money. But it can also prove expensive if you’re unclear on how it works.

Here’s everything you need to know about deferred interest and how to decide if it’s a good deal for you.

What is deferred interest?

Deferred interest is essentially what it sounds like. It’s a type of financing that allows you to defer making interest payments until a later date.

Retailers that offer in-store financing or store credit cards can use promises of deferred interest to attract new customers. For example, if you’re buying new living room furniture the store might offer deferred interest financing for 24 months.

“It allows you to pay for something using credit with what appears to be no interest or a 0 percent interest rate, meaning that when you make payments on your purchase, your entire monthly payment is going to the balance on the card or loan,” says Deacon Hayes, founder and owner of Well Kept Wallet.

Deferred payments do not hurt your credit, as issuers and lenders report approved deferments as accounts in good standing to the credit bureaus.

How deferred interest works

Deferred interest doesn’t mean interest free. You’re simply delaying the payments on interest. When you will have to pay interest depends on the financing terms. For example, your deferred interest period may be as short as six months or stretch up to 24 months. During that time, you aren’t required to pay interest, but interest would still accrue on the original purchase amount.

If you pay the balance in full before the end of the promotional period, you won’t have to pay any of that interest. However, if you still have a leftover balance (even a few dollars), you will have to pay all of the interest that’s accumulated since the purchase date.

That could prove costly if you made a larger purchase using deferred interest financing that carries a steep APR. According to CreditCards.com data, the average retail store card APR is 26.72 percent, which is more than five percentage points higher than the average APR for general purpose cards (22.66 percent). And there are several retail cards charge higher than 30 percent.

Pros and cons of deferred interest

Just like any sort of credit line, there are advantages and drawbacks. Carefully weigh and consider the costs and benefits of deferred interest financing before deciding whether or not it’s the right choice for you.

Pros

  • Convenient financing option
  • Can help budget for large purchases
  • Some offers come with purchase discounts at sign-up

Cons

  • Extremely expensive if not paid off
  • Opening a new card means hard credit inquiry
  • Higher average interest rates

Deferred interest vs. 0% APR credit card offers

Deferred interest offers and 0 percent APR credit card promotions may seem the same, but there are some key differences.

“The difference between deferred interest and a 0 percent APR on a credit card is that with the credit card, when the introductory 0 percent interest period ends you won’t [owe] back interest from the time of the initial purchase,” says Hayes.

The easiest way to tell if you’re signing up for a deferred interest plan is to read the fine print outlined in the financing agreement. Specifically, look for wording related to:

  • How interest accrues
  • The rate at which interest accrues
  • The regular purchase APR
  • When the final cutoff date is for paying the balance in full to avoid interest charges

The Amazon Store Card’s fine print, for example, includes the following language to explain how the card’s special financing offers, which come with deferred interest, work: “Interest will be charged to your Special Financing-Enabled Card account from the purchase date if the promotional balance is not paid in full within six, 12 or 24 months respectively.”

The fine print goes on to say that to avoid interest with special financing you would need to pay the entire promotional balance in full before the end of the offer period.

If the financing is truly 0 percent, then the cardmember agreement would use different wording. For example, the Discover it® Cash Back includes this language in its rates and terms: “Annual Percentage Rate (APR) for Purchases: 0 percent intro APR for 15 months from date of account opening. After the intro APR expires, your variable APR will be 16.24 percent to 27.24 percent based on your creditworthiness.”

It’s important to understand those differences so you know what you could end up paying for interest.

“If you’re aware of all the specifics of deferred interest financing, it can be beneficial,” says Nathan Wade, former director of marketing at WealthFit Investing. “However, if you’re not well-versed, there is a chance you’ll pay more than you intended.”

How to make deferred interest offers work for you

If you’re thinking of using deferred interest financing, having a plan is the best way to use it to your advantage. That starts with examining your budget to see what you can realistically afford to pay each month.

“You’ll likely have to pay more than the stated minimum payment in order to be able to pay off the entire balance without being charged deferred interest,” says Hayes.

Say, for example, that you make a $1,200 purchase with deferred interest for 12 months. You would need to pay at least $100 per month to zero out the balance to avoid interest charges.

If you can’t pay off your credit card balance before deferred interest is applied, opt for a balance transfer to a 0 percent intro APR credit card. Remember, you will have to pay a balance transfer fee, but it will usually cost much less than the deferred interest amount that accumulated over time.

Tips for paying off a deferred interest purchase

If you’ve taken advantage of a retail card’s deferred interest deal, there are certain tips you can use to help pay off the balance before the promotional period ends:

  • Set up automated payments. Automated payments will keep you on track. Be sure that your auto-pay amount matches what you’ll need to pay each month to clear the balance. This will also ensure that you don’t miss a payment, which could result in a default.
  • Set a calendar reminder for a few weeks before the deferred interest period ends. That way you’ll have time to prepare for the final payment.
  • If in doubt, contact your issuer. If you’re close to the end of the promotional period and you’ve made your final payment, check with your issuer to confirm you won’t be charged any interest on your next statement.

Alternatives to deferred interest offers

Even if you have a plan to pay off the balance in full in time to avoid the deferred interest, we all know that life is full of surprises and if an unexpected expense pops up to derail your repayment plan you could be stuck with a hefty bill. That’s why, for most people, a credit card with a 0 percent introductory APR on purchases is a better choice.

There are numerous cards that offer generous 0 percent APR introductory periods, including:

  • Discover it Cash Back: 0 percent introductory APR for the first 15 months on purchases and balance transfers, then a variable APR of 16.24 percent to 27.24 percent applies
  • Bank of America® Customized Cash Rewards credit card: 0 percent introductory APR for the first 18 billing cycles on purchases and balance transfers made in the first 60 days, then a variable APR of 18.24 percent to 28.24 percent applies
  • BankAmericard® credit card: 0 percent introductory APR on purchases for the first 21 billing cycles on purchases and balance transfers made in the first 60 days, then a variable APR of 16.24 percent to 26.24 percent applies
  • Chase Freedom Unlimited: 0 percent introductory APR on purchases and balance transfers for the first 15 months, then a variable APR of 19.24 percent to 27.99 percent applies

The advantage of using a card with an introductory 0 percent APR on purchases is twofold.

First, if you don’t pay in full before the promotional period expires, you’ll only be subject to interest charges on the remaining balance, not the original balance.

Second, you could earn rewards on the purchase if you choose a cash back credit card. Those rewards could be applied as a statement credit or cash back that you could use to pay the bill, reducing the amount you have to repay out of pocket.

When comparing 0 percent introductory APR cards, consider the rewards structure along with the annual fee. And of course, pay attention to the regular variable APR for purchases once the promotional period ends just in case you’re not able to pay off the balance in time.

Bottom line

Deferred interest promotions are a way for retailers to get customers to sign up for their store credit cards. While it’s similar to a 0 percent introductory period, deferred interest actually accumulates and is charged to the account if the entire purchase is not paid off at the end of the period.

Most consumers are better off applying for a credit card with a 0 percent APR introductory rate than opting for a card that has deferred interest financing. However, if you can pay off the entire purchase balance before the end of the terms, deferred interest cards can help finance large purchases that are paid off over time.

Editorial Disclaimer

The editorial content on this page is based solely on the objective assessment of our writers and is not driven by advertising dollars. It has not been provided or commissioned by the credit card issuers. However, we may receive compensation when you click on links to products from our partners.

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