Category: Holiday Guide 2018

This post is sponsored by Diamond Bloggers. Any opinions expressed are my own. Data provided by Wallethub.

The average shopper is set to spend $1,007 this holiday season.  A good chunk of that will be put on credit. It’s not uncommon for stores to push their credit cards and offer things like first time purchase discounts and deferred interest. You’ll here “yea if you open up a store card today you have no interest for a year” which sounds like a good deal but stores know what they’re doing.   82% of people are unaware of how deferred interest actually works.

WalletHub recently released it’s 2018 deferred interest survey and it’s Store Credit Card Landscape report  to help you with these retailer financing options.

Deferred interest is when a retailer advertises a low introductory APR – often 0% – and gives a consumer the chance to pay for their purchases without interest, only to slam them with interest charges (as if the regular APR had been in place from the start) if they are unable to do so. This can result in a shopper spending up to 27.5 times more on interest relative to a normal 0% credit card offer.

Retailers almost count on a consumer to not be able to pay off the debt in the time frame they offer the 0% APR.  Let’s say they offer 0% APR for 1 year, You’re paying it on time you’re doing good but maybe you’re only making the minimum payment or a little more thinking “I’ll have it paid off by the end of the year” but something happens that you can’t.  On day 366 boom all that interest they would have normally charged is sitting on your credit card now.  All that work you did to pay on time and it’s like starting from the beginning because of the interest charges.

So what do these surveys from Wallethub have to say?

Key Findings:

• 85% of store credit cards with 0% intro APRs have deferred interest.
• 82% of people do not know how deferred interest works.
• 79% of people, who understand how deferred interest works, think it is unfair; 62% think it should be illegal.
• 64% of people say 0% financing is a bigger draw for a store card than a first-purchase discount.
• The average store card with a first-purchase discount gives 29% off.
• The average store credit card has a regular APR of 28.62%.
•  The average store credit card with a 0% intro APR has no interest for nearly 17 months.
• All store credit cards have $0 annual fees. The average general-use credit card charges $15.88 per year.

Expert Commentary:

The cost of a happy holiday season all too often seems to be some post-New Year’s pain, as overspending catches up with us and expensive interest charges start rolling in. In the past five years, we’ve spent a total of $3.2 trillion on holiday shopping and racked up $238.8 billion in credit card debt during the fourth quarter.

A lot of times, people plan for a bit of post-holiday debt. But other times, would-be holiday savings can turn into big surprise bills due to a dangerous feature of most retailer financing plans called deferred interest. Deferred interest is when a retailer advertises a low introductory APR – often 0% – and gives a consumer the chance to pay for their purchases without interest, only to slam them with interest charges (as if the regular APR had been in place from the start) if they are unable to do so.

Although 85% of 0% APR store cards have deferred interest, fewer than 2 in 10 people even know what it is. So consumers who are unfamiliar with the term are not alone, but most shoppers are vulnerable to getting burned by this trick. One big reason for that is major retailers don’t seem to care about being more transparent. They don’t tend to list what the regular, deferred interest rate will be in large enough font or in a prominent location. And their average transparency scores are unchanged dating back to 2015, according to WalletHub’s research.

“Marketers and retailers are always trying to make money. Some will exploit consumers’ weaknesses and vulnerabilities in order to do so,” said Kelly Goldsmith, an assistant professor in the Kellogg School of Management at Northwestern University. “This has probably been true since the dawn of commerce, and it will probably never change.”

But perhaps unsurprisingly, consumers who learn what deferred interest is, how it works and how common it is aren’t happy about the situation and want change. Nearly 8 in 10 people say deferred interest is “unfair,” while more than 6 in 10 people go as far as to say it should be illegal. Indeed, it is fair to wonder why regulators would allow this type of “gotcha” pricing to persist, especially after so many other financing tricks were eliminated in the aftermath of the Great Recession.

“I think it should remain legal because it can be a good deal for all parties involved, but I think it should be highly regulated,” said Rick Scott, associate professor of finance at Saint Leo University. “Borrowers should have to sign a short, well-worded, and easy to understand disclosure that they understand that the 0% financing is temporary and that they should be on the hook for substantial interest charges if they do not pay off the financing by the end of the teaser period.”

In the meantime, there are plenty of other ways to prevent deferred interest from costing you. You could take advantage of a 0% retailer financing offer, despite the risks posed by deferred interest, as long as you’re prepared to pay your bill in full by the deadline. You could also get a 0% credit card on the Visa, Mastercard, American Express or Discover network, which won’t have deferred interest.

Or, you could strive to pay for your holiday purchases in full within a single billing period. Rewards can really help with that. For example, the average store credit card with a first-purchase discount gives 29% off. And several general-purpose credit cards have sign-up bonuses of $500+ for spending a few thousand dollars within a few months of opening an account.

As long as you have a plan and stick to it, there’s no reason your holiday cheer has to come to an end come 2019. Not even deferred interest needs to spoil the fun.

“The internet age has made it easier than ever before for consumers to educate themselves about the various costs and benefits associated with promotional offers, like deferred interest financing,” Northwestern’s Goldsmith said. “Consumers should take advantage of this amazing advantage they now have and use these resources to inform their decision making.”