Beware deferred interest credit cards — they’re not 0% interest

How well can you size-up a credit card promotion?

It’s hard to keep a cool head in the heat of the retail moment. You’re about to make a big purchase and the clerk is waving a store credit card offer before you.

“No interest if paid in full within 12 months!” they’ll say. Or, “0% intro APR on purchases for 12 months.”

They sound like great deals. But the offers aren’t the same, and one can cost you considerably more over time.

Both cards, usually offered by retailers, set aside a time when you pay no interest on the money you borrowed to buy a sofa, say. But one card charges no interest for that time, while the other just defers interest you would have paid.

The deferred interest card could cost you quite a bit more if you’re not paying attention. If you still have a promotional balance when the time is up, you’ll be charged back interest.

More people are buying things with deferred-interest promotions, according to the Consumer Financial Protection Bureau. More than a third end up paying 150% of the balance, according to a CFPB study. Many consumers mistakenly believe these to be 0% interest.

Here’s the difference between the offers and what to look for when comparing them.

Deferred interest vs. no interest

Deferred-interest credit cards are often offered by places selling big-ticket items that you may not be able to pay for at once like furniture, tires, appliances, even medical or dental services.

An offer like, “No interest if paid in full within 12 months!” doesn’t mean that there’s no interest. It means you’re not being charged interest — yet. The interest accumulates — usually at a high rate around 25% — for the promotional period. But it’s pushed back, or deferred, till the end of your time window.

If you pay off your purchase within a the window of time — you’re good. There is no interest owed.

If, however, you do have a remaining promotional balance — even just a tiny bit — the interest built up over the promotional period is charged all at once. Along with monthly interest on any balance going forward.

On the other hand a no-interest promotional period or 0% interest card has an interest rate that changes.

For the promotional window of time the interest is 0%. When the promotional period is over it will jump to a higher rate, like 25%, going forward. That higher rate will apply to any balance going forward, but no back interest is charged.

What to know when comparing card offers

Both kinds of cards can whack people who aren’t paying attention with massive interest payments. Retail cards in general usually carry a higher interest rate than a typical bank card, making it all the more important to know the timeline and costs of the card you pick.

Look for keywords: Card offers that include the word “if” or “until” tend to be deferred interest arrangements. Beware of appeals like “No interest if paid in full in 6 months,” or “Buy now and pay no interest until next year.”

Know your time window: How long is your promotional period? Don’t assume it’s a year. It could be six months or 18 months. That is the timer on how long you have to slay the balance.

Know your interest rate: Be sure to know the interest rate on your card. For a 0% card, the interest rate will be 0% for the promotional period. After that it will jump to higher rate. With a deferred interest card, the rate remains the same throughout.

Have a payment plan: You’ll need to know how much you have to pay each month to dispatch the balance within the promotional window of time. Paying the minimum is probably not going to get you there. If you bought a sofa for $1,000 on a deferred interest credit card charging 25% interest and you pay the 3% minimum payment starting at $30, it will take you more than 10 years to pay it off. You’ll end up paying 150% more than the cost of the sofa, including $1,500 in interest.