You've seen the ads: "Buy now and pay no interest until next year." Or "No monthly payments for six months." Sound like good deals, especially if you're strapped for cash.
The offers can be money-savers if you pay off your purchase before the interest-free/no-payment period ends. If you don't, you could find yourself with a much bigger bill than you expected. Some of the offers "definitely are traps," says Gerri Detweiler, author of The Ultimate Credit Handbook. "Lenders wouldn't do it if it weren't profitable for them."
Read the fine print
The deals vary from store to store, but most involve either no monthly payments for a certain period of time or no interest on payments made during the promotional period. To get these deals, you usually have to sign up for a store's credit card. Many stores also require a minimum purchase to qualify for the zero-percent financing.
The catch comes when you don't pay off your balance by the end of the promotional period. Detweiller says it's common for interest to be charged to your account from the date of purchase. We checked several retailers offering no-interest deals and found that Best Buy, Lowe's, Home Depot and CompUSA were among those who charge interest from the date of purchase if the balance isn't paid off in time.
What's more troubling, says Steve Rhode, president of Myvesta, a nonprofit financial counseling organization, is that some stores don't send consumers monthly statements during the promotional period. Consumers then forget to pay off the purchase.
When all that interest they thought they were avoiding gets tacked on to their bills, consumers end up paying more than if they had charged purchases to a low-interest credit card and made monthly payments, he adds. That's because interest rates on store credit cards tend to be high. Best Buy, which has an offer of no interest until January 2004, charges 19.8%. Home-improvement stores Lowe's and Home Depot charge up to 21%. The Sears credit card charges up to a whopping 24.9%.
When the deal really is a deal
Say you bought a $2,400 laptop computer using Best Buy's no-interest-for-a-year offer rather than using a credit card with a 10% interest rate. You'd avoid $138 in interest if you paid off the purchase in a year.
But if you made only the minimum monthly payment required by Best Buy (2.25% of balance), you would pay almost $2,000 in interest by the time it took you to pay off the balance. Remember you lose the break on interest if you don't pay off the balance by the end of the year. So in the end, you would be paying almost double what the computer cost. This calculator can help you figure how much these "deals" can really cost you.
The majority of people who make purchases with these offers don't pay off the balances before the due date, Rhode says. But if you know you'll have the cash -- perhaps from a tax refund -- go for it.
Who should avoid these offers
Before making a purchase with one of these offers, Detweiler says you should ask yourself, "If I can't afford it now, will I be able to afford it later?"
Signing up for these deals can also hurt your credit score. "If your credit ranking is shaky, adding a new account with a balance could ding your score," Detweiler says. A low credit rating could hurt your chances to secure future loans or get credit cards.
Another reason to be wary of these offers is the underwriter. You probably won't be able to distinguish whether the underlying lender is a store-front -- or subprime -- lender. Because such finance companies tend to lend to people with poor credit, they can be a mark against your credit report, Rhode says.
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