What is deferred interest?
Editor's Note
At TPG, we believe in and advocate paying your credit card balance in full each month to avoid paying interest that can chip away at your rewards earnings. However, if you can't pay off your entire balance, many credit cards have promotional offers with a 0% annual percentage rate, or APR, for new and existing cardholders.
These offers can help you make large purchases and pay them off over time without accruing interest on any monthly balance you carry over. This practice of putting off interest charges is known as deferring interest.
In this article, we'll explain exactly what deferred interest is and how you can use it to your advantage while avoiding its pitfalls.
What is deferred interest?
Deferred interest means that any money you borrow will not incur any interest charges for a set period.
Technically, interest still accrues from the first day of purchase, but the borrower won't be required to pay the interest as long as they pay off the entire balance within the promotional period.
For example, if your credit card offers deferred interest on purchases for six months, a purchase of $2,000 will have to be paid in full before the end of the six months to avoid interest charges that were accruing but deferred.
Related: How to use interest-free credit cards
How to identify a deferred-interest offer
When a credit card issuer provides a deferred-interest offer, it will use language such as "no interest for 12 months" or "no interest if paid in full."
However, it's critical that you read the offer details because if you fail to pay off a balance on a deferred-interest plan within the offer period, it may end up costing you more, negating any savings you would have realized.
If the terms and conditions of an offer seem confusing, we recommend that you contact the credit card company for clarification.
Benefits of deferred-interest plans
There are several benefits of deferred interest plans that can provide consumers with a financial cushion. Deferred-interest plans, which may include 0% interest promotions, are usually easier to qualify for than a new credit card.
Electronics, home improvement and other types of stores often provide deferred-interest plans on purchases. This is an excellent way for those with fair or poor credit to finance a new appliance or other large purchase.
The main benefit of a deferred interest plan is the potential to save money. Borrowers can eliminate interest charges on their purchase as long as the entire balance is paid before the promotional period ends.
Disadvantages of deferred-interest plans
There can also be downsides to deferred-interest plans. Here are some points to consider before you sign up.
Deferred-interest plans can be detrimental if you receive retroactive interest charges. This can happen if you don't pay off the entire balance in full prior to the end of the promotional period.
The interest charged will be cumulative, meaning you will be responsible for interest dating back to the date of your original transaction.
Another disadvantage is dealing with high interest rates. The average credit card interest rate is more than 21%, and deferred interest plans can carry even higher rates.
If the balance is not paid in full, the interest charges can be even more burdensome, especially if you are looking to avoid interest and minimize debt.
Ultimately, you should always read the terms and conditions of any offer carefully. The lender or credit card issuer providing the deferred interest plan may include stipulations, such as a voided offer, if a payment is missed or the minimum payment is not made.
Related: How to avoid late fees
How to avoid paying deferred interest
If you decide to enroll in a deferred interest plan, there are some steps you can take to ensure you pay the balance in full and avoid interest charges.
- Create a plan: Develop a plan to pay a certain amount on your balance each month.
- Automatic payments: Set up automatic payments to avoid missed payments and subsequent late fees.
- Don't just make minimum payments: If you are paying off a large balance, the minimum payment required by the lender may not be enough. Pay more than the minimum to ensure the balance is fully paid.
Bottom line
Deferred-interest offers are worth considering if you're looking to make a large purchase and don't have all of the cash available upfront. Just remember that if any balance remains after the promotional period ends, even if it's only $1, you will be responsible for all of the interest accrued since the first day of purchase.
For that reason, always read the terms and conditions in full and have a plan to pay off the balance.
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