Holiday spending can be a stressful time even in stable economies but credit experts warn that taking advantage of “deferred interest” or pay later offers could add more stress to family budget when it’s time to pay up.
Credit experts polled in a CardHub report say retailers will begin flaunting “pay later” offers in the coming weeks as holiday shopping gets underway.
“One thing consumers must watch out for in this regard is a feature known as ‘deferred interest,’ which is commonly found lurking in the fine print of retailer-branded payment plans,” said Alina Comoreanu, research analyst with CardHub.
She said deferred interest financing is a wolf in sheep’s clothing that often pairs an enticing offer like “0% for 12 months.” Comoreanu warns that the special financing terms used by a majority of retailers from Walmart to Best Buy and Amazon contain a clause that allows finance charges to retroactively apply to an entire original purchase amount if you make a late payment or leave even the tiniest of unpaid balances when the introductory deal ends.
Credit experts say bank cards offering 0% interest in contrast will typically assess interest only on whatever balance remains when the introductory term expires.
KNOW THE RISKS
Jeff Jones, a business professor at Missouri State University, said all cards are not created equal and consumers need to do their homework before being sucked into pay later terms.
“For someone who is financially savvy, deferred interest financing arrangements can be beneficial, essentially providing an interest-free loan. This is especially true in situations where the retailer will not offer a price discount if the buyer pays cash at the time of the sale,” Jones said.
However, for those who are less financially savvy, deferred interest loans can be problematic, particularly when the credit terms are not explicitly explained to the buyer, he added. Jones doesn’t believe retailers are intentionally trying to confuse consumers. He said companies just do everything in their power to generate sales and keep up with their competitors.
“Even if the terms are fully explained, sometimes they are misunderstood by the consumer, which can result in large and unexpected interest charges down the road,” he said. “If deferred interest financing arrangements are allowed under the law, then most retail companies that sell “big-ticket” durable goods are forced to adopt them in some form.”
Jones said a holiday shopper who opens a new retailer credit card to finance a few big-ticket items on the Christmas list should examine how the interest – deferred or otherwise – will be assessed before they use the card. If the shopper charges $800 on a retailer credit card offering deferred interest charges for six months but it takes them seven months to pay off the debt, the retailer may retroactively charge all the interest from the date of the purchase. In this case the shopper would be charged 27.5 times more for those items, or $55 in interest charges, which likely erases any Black Friday deals they were trying to achieve.
UNEVEN TRANSPARENCY, RATES
The CardHub study evaluated 49 large retailers to see which ones offer deferred interest financing and how transparent they are with the terms. The researchers found
many retailers offering special financing terms are less than up-front about the true potential costs of these plans.
The nation’s largest retailer Wal-Mart Stores has offered deferred interest financing since 2012 on all the items it sells. The deferred interest option is available for six months, one year, 18 months or two years. The interest rate charged by the retailer has ranged from 16.9% to 22.9% after the deferral period expires. CardHub warns that Wal-Mart is one of the 16 retailers in the study offering deferred interest with only moderate transparency of the terms. Competitor Best Buy has a similar transparency rating on the terms disclosures as Wal-Mart, but the average interest rate charges are higher at 25.24%.
Amazon, Pottery Barn, Lowe’s and Toys R Us were among the retailers with a slightly lower transparency rating than Wal-Mart. When using deferred interest at these retailers, credit experts urge shoppers to look at the interest rate charges closely as they are among the highest with the least amount of disclosure. According to CardHub the rates are:
• Amazon, 25.99%;
• Pottery Barn, 26.99%;
• Lowe’s, 24.99%; and
• Toys R Us 26.99%.
Other retailers offering deferred interest with the highest transparency scores include J.C. Penney and Tractor Supply. Sears and Home Depot also had high scores related to payment term disclosures. That said, these retailers also charge some of the highest interest rates in the nation. Rates for the retailers in the group are:
• J.C. Penney, 26.99%, with 3-year deferred option;
• Home Depot, between 17.99% and 26.99%, deferred for 6 to 12 months;
• Tractor Supply, 25.99%, deferred for 6 to 12 months; and
• Sears, 25.24%, deferred for 6, 12, or 24 months.
Retailers like Victoria’s Secret and GameStop are expected to begin offering deferred interest options ahead of the holidays. Their interest rate charges as of Oct. 12 were 24.99% and 26.99%, respectively.
Lastly, the CardHub survey found at least 15 retailers that do not offer deferred interest options with their credit cards. Some of those include Target, Costco, TJX, Nordstrom, Dillard’s Belk, Gap, Kohl’s and Ace Hardware. The experts said the rates charged by these companies vary from 15.24% at Costco, to 26.99% charged at TJX, who controls TJX and Marshall’s and HomeGoods.
Retailer’s like Ace True Value and Apple offer tiered interest charges based on credit score. The interest rate range from 13.99% to 22.9% at Ace 13.99% to 26.99% at Apple. Nordstrom offered the lowest rate at 10.9% to consumers with high credit scores. The top rate at Nordstrom was 22.9%.