It's easy to get caught up in the holiday rush. You buy a gadget you don't need, gifts for relatives you rarely see and end up spending a lot more than you'd planned.
But when you're scouting deals on Black Friday, there's a potential trap lurking that could cause a financial hangover that lasts deep into the new year: deferred interest.
Deferred interest credit cards typically offer 0% financing that can be used to purchase big-ticket items like TVs or refrigerators. The catch is that if you owe even a few dollars after the promotional period ends – or are late making a payment – you'll not only owe interest on the remaining balance, you'll have to pay interest on the amount you've already paid off.
“They’re very popular around this time of the year when people are shopping,’’ said Odysseas Papadimitriou, CEO of the personal finance site WalletHub. But “it really is a practice that is betting on tricking people to buy something now without realizing what they’re getting themselves into. The simplest advice is to stay away from them, period.’’
How deferred interest cards work
Let's say you grab a doorbuster deal on a smart TV and open a store credit card so you can gradually chip away at the $300 price tag without racking up interest.
If you owe $50 when the promotional period ends and the annual percentage rate (APR) kicks in, you'll have to pay interest on the entire $300, not just the remaining $50 balance.
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Retailers say the interest-free period usually ranges from six to 24 months, giving budget-conscious shoppers time to pay off their purchase.
"For many shoppers, these programs make purchases more affordable than a general-purpose credit card purchase where interest often begins to accrue immediately,'' says Austen Jensen, senior vice president of government affairs for the Retail Industry Leaders Association.
He added that "these programs are one of many options for customers, but they are highly sought after by educated consumers who understand the details and potential savings. And for those that choose to utilize them, setting up a regular auto-payment is easy to do."
But critics say it's often not clear to shoppers how much they could ultimately owe.
"It’s confusing and inherently deceptive,'' says Chi Chi Wu, a staff attorney at the National Consumer Law Center, who added that deferred interest cards are also often pushed at dentists' offices when patients are pondering how to pay for a procedure.
Not all 0% offers are the same
Deferred interest cards are different from the 0% offers consumers can apply for directly with card issuers, finance experts say. Rather, they tend to be the "no interest'' financing deals pitched by retailers as you're browsing a store's aisles or website.
If you're hedging on buying a pair of diamond earrings or lawn mower because of the price, a no-interest offer might coax you into the purchase. Among shoppers surveyed by WalletHub, 59% said the promise of 0% financing was what made a store credit card most appealing.
But the survey also found 82% of consumers didn't know how deferred interest worked.
"People aren’t using these offers to buy a pair of shoes,'' Papadimitriou said. "They're using these offers to buy a refrigerator, an appliance, a couch. ...The interest on these cards according to our data is around 28%. So they go back and assess you 28% on $1,000, that's a lot of money for most people.''
In 2016, consumers using these cards charged more than $50 billion in purchases and paid roughly $2 billion in deferred interest, the Consumer Financial Protection Bureau says.
The Consumer Bankers Association, which represents many retail banks in the U.S., says that its members work with merchants to make sure payment requirements are clear. But those details may not always be communicated sufficiently by a store employee.
"If I'm in a mall and I'm at a store and I'm offered a card at the point of sale ... I can see a situation in which the consumer isn't given full disclosure," says David Pommerehn, senior vice president and associate General Counsel for the CBA. "The bottom line is deferred interest can be a highly useful tool for consumers to finance necessary purchases in their lives, but disclosure is key.’’
Don't bite off more than you can chew
Even if you believe that you can pay off the item before the promotional period ends, Wu says such cards just aren't worth it.
"Something could happen when you need money for more important expenses like medical bills,'' Wu says. "Or you lose your job, and all of a sudden you're going to be hit with this big interest bill ... you weren’t planning on because you thought you would be able to pay the whole thing off.''
A better money move might be to use a different credit card, she says, even if it has an interest rate of, say, 14%, which is still lower than the rate typically charged by a deferred interest card after the 0% financing offer ends.
There's also another option.
"For things like holiday gifts, if you have to put it in on a card, maybe think about not getting something so expensive,'' Wu says. "Don’t be tempted to buy something really pricey by the lure of no-interest promotions.’’
Follow Charisse Jones on Twitter @charissejones
This article originally appeared on USA TODAY: Black Friday: Should you get 0% interest credit card to grab that gift