When you’re out shopping through the holiday season and get to the register, keep in mind that sales associates are under enormous pressure to get you to sign up for a store credit card.
They may offer incentives like “20% off your first purchase” or “0% special financing for 12 months.”
Warning: Do NOT sign up for these credit cards
These offers can be very tempting to people who are on a tight budget — especially around the holidays — but they come at a steep cost once the grace period is over.
It’s all because of deferred interest, which money expert Clark Howard refers to as “hideous retroactive interest.”
Here’s an example:
Bonnie goes to the register and her total comes to $1,000. The cashier asks if she’d like to open a store card to receive no interest financing for six months.
She gets approved for instant credit and is grateful for the extra time to pay for the items.
At the end of the six months, Bonnie has paid off all but $50 of the balance and plans to send in the last $50 the following month.
But to her surprise, she receives a $250 interest charge on her very next bill!
Clark: Beware of ‘hideous retroactive interest’
How could this happen? With a normal 0% credit card offer, interest only applies to the balance remaining after the special financing period is up.
However, retailers that offer special financing with deferred interest don’t work the same way.
If you miss a monthly payment or don’t repay your full balance within the 0% period, interest is applied retroactively to the original purchase amount.
That’s how Bonnie from our example was charged $250 in interest for a $50 balance. It’s like the 0% rate never existed!
According to WalletHub’s 2017 Deferred Interest Study, 61% of people think retroactive interest is unfair and 50% believe it should be illegal.
Here’s a look at the retailers that use deferred interest:
Store cards charge up to 30% interest
Deferred interest isn’t the only problem with store-only credit cards. They’re known for having regular interest rates much higher than general-purpose cards — some as high as 30%.
The average retail card APR (annual percentage rate) is 24.99%, according to a study from CreditCards.com.
“Instant credit should be called instant debt,” Clark said. “When people take instant credit here, there and everywhere, they end up in debt not to their eyeballs — but above.”
Clark says you’re better off using the regular credit card that’s already in your wallet or just pay with cash!
Recap of Clark’s take:
- One-store-only credit cards are inferior to general-purpose cards
- Always pay your balance in full every month
- Read the fine print to avoid deferred or retroactive interest