There’s a reason why consumers historically incur a lot of credit card debt during the fourth quarter of the year and then pay off much of it during the first few months of the New Year: The holidays are expensive.
Exactly how much the average consumer is expected to shell out on gifts this holiday season depends on the survey you consult, but prognosticators generally agree we’ll spend more than last year. Considering fourth-quarter credit card debt build-ups have gotten progressively larger each of the last three years—growing from $22.5 billion in 2009 to $44.3 billion in 2011—financing will likely be in high demand. While there are certainly a number of valuable financing offers out there, consumers will have to navigate a proverbial minefield of predatory payment plans if they want to save money instead of unnecessarily inflating their costs.
Card Hub recently released its 2012 Deferred Interest Study, which examined the types of financing offered by the nation’s largest retailers. Not only did it reveal that eight in 10 major retailers offer financing to their customers, but more than 60 percent of them provide confusing plans that offer an initial zero percent term but will backdate interest charges from the beginning if the entire original balance is not paid off during the introductory period. Consumers who mistakenly sign up for a deferred interest payment plan from a popular retailer, such as Apple, Amazon, or Best Buy, are in for a rude awakening if unexpected costs or good ol’ forgetfulness conspire to preserve a small balance for as little as one day too long.
For example, imagine you spend $850 on gifts this holiday season and jump at the chance to score zero percent financing for six months via a retailer’s co-branded credit card (which, by the way, has a 17 percent regular rate). While you plan on being debt free before that 0 percent term concludes, car trouble prevents you from allocating more than $700 to your holiday debt. Paying interest on $150 isn’t that big of a deal, you think, assuming you’ll be able to pay off what remains within a month and thereby pay no more than $2 in interest when all is said and done. However, what you may not know is your credit card’s fine print explains that the 0 percent offer was part of a deferred interest payment plan and since you didn’t pay off the full amount within the allotted time, it’s like your original balance was accruing interest at a 17 percent clip from the start. Quickly referencing a credit card calculator reveals this oversight has increased your overall financing costs to $49.
That might not seem like a lot, but how many people do you know who’d be thrilled at the prospect of throwing $50 down the drain during one of the most expensive times of the year? Obviously, no one in their right mind hopes for a bigger financial burden, especially since the country’s economy could soon take a swan dive off a steep fiscal cliff. Plus, you have to consider the fact the $50 interest charge is the result of an $800 purchase, and it could become significantly higher if you spend more.
You might at this point be wondering how likely it actually is for someone to mistakenly enter into a deferred interest financing agreement. Well, it’s easier than you might think considering the following:
• Many retailers offer their deferred interest plans through co-branded credit cards. Credit cards that offer non-deferred 0% introductory terms have become quite common since the Great Recession. Issuers are using them to attract new customers with excellent credit, and they actually offer a lot of value. For instance, the Citi Diamond Preferred Card (0 percent on new purchases for 18 months with no annual fee) and the Slate Card from Chase (0 percent for 15 months with neither an annual fee nor a balance transfer fee) were tapped by Card Hub as two of the best credit cards for holiday shopping and can save you hundreds of dollars in interest, depending on your spending and payment habits.
• Issuers generally aren’t transparent about their financing policies. More than 54 percent of major retailers aren’t willing to comment on the details of their financing plans, which indicates they care more about the ability of such offers to drive sales than their potential to harm consumers.
• Store employees don’t tend to have the requisite training to accurately provide detailed information to customers. In the course of conducting this study, Card Hub called numerous store locations in search of information, and employees were more likely to relay inaccurate or conflicting information than they were to accurately disclose their store’s financing offers.
• Deferred interest isn’t limited to low-level retailers. Big-name stores that are extremely popular during the holiday season, such as Apple, Macy’s, Toys R Us, and Victoria’s Secret, offer deferred interest payment plans, which means it’s difficult to guess whether a given company offers such a plan based on reputation.
The safest course of action might then be to eschew issuer-specific financing offers this holiday season. Whether you instead opt for a traditional zero percent credit card or place increased emphasis on paying off holiday debt as quickly as possible, you at least won’t be in for any surprises.
That in-and-of-itself is a recipe for holiday cheer—for both you and your wallet.
Odysseas Papadimitriou is the CEO of Card Hub, a leading personal finance website that recently released its annual list of the Year's Worst Credit Cards.