"I bought a $3,000 couch on a store card with 0% APR for 18 months. I made all the payments. At month 19, they charged me $500 in back interest. I didn't even know that was legal."
That was a voicemail from a client I'll call Debra. She wasn't wrong. Deferred interest is legal, and it's one of the dirtiest tricks in retail lending.
Here's how it works: you buy something with a "0% for 18 months" offer. You make all your payments. But if you have a single dollar left at month 18, the lender charges you all the interest from the entire 18 months — usually at a rate of 25-30%.
Debra had paid $2,950 of the $3,000 by month 17. She thought she was almost done. Then she forgot to make the final $50 payment. At month 18, the store card charged her interest on the entire $3,000 — around $500. She called me furious.
I told her to call the card issuer and ask for a goodwill adjustment. She did. They refused. She paid the $500 and cut up the card. That $3,000 couch cost her $3,500. Not a great deal.
How to avoid this trap:
- Ask: "Is this deferred interest or true 0% APR?" True 0% charges interest only on the remaining balance after the promo ends. Deferred interest charges on the original balance.
- Set up auto-pay for at least the minimum, but better yet, for the amount that pays off the balance one month early.
- Mark the promo end date on your calendar. Pay it off two weeks before.
Debra now pays for everything with a cash-back card and pays it in full every month. She's never paid interest since. Good for her.
Don't let "free" credit trick you. Read the fine print. Pay it off early. And if you can't, don't buy it.
I will keep posting updates on this. Check back soon.
P.S. Cooper just knocked over my coffee. That's deferred mess — I have to clean it up now or it'll stain. Same concept.
— J.W.