During the rush to buy last-minute, big-ticket gifts before Christmas, some shoppers could have saved a bundle in the long run by just walking away from tempting 0 percent, "no-interest-now" deals.
Yep, walk away. Sure, you think you'll pay off the purchase in full before getting hit by double-digit rates. But will you, really? Will you be late with a monthly payment and lose that 0 percent?
Consumer watchdogs warn that there are plenty of ways for shoppers to get caught paying far higher rates than they'd expect from what's marketed as a "no-interest-if-paid-in-full" deal.
About 43 percent of borrowers with not-so-great credit — consumers with credit scores below 660 and known as subprime borrowers — did not pay off all their balance before interest kicked in when they participated in a deferred-interest program, according to an October report by the Consumer Financial Protection Bureau.
"Deferred-interest products can be risky for consumers in the best of circumstances," Richard Cordray, director of the CFPB, said in a statement.
This type of deal can work for people who carefully watch due dates and who could pay cash on the spot anyway.
But many still could start out with good intentions to pay off the bill in 12 or 18 months. But say a monthly payment is mailed late during that time; or the furnace breaks down; the tax refund doesn't arrive on time; someone gets sick or loses a job.
About 12 percent of consumers with the best credit did not pay off the bill in full and triggered interest charges with those deferred-interest programs, the CFPB said.
"Lenders count on the fact that some percentage are going to trip up," said Chi Chi Wu, staff attorney for the National Consumer Law Center in Boston.
Consumer advocates would like to see deferred-interest plans banned, and some say the programs are one of the "nastiest tricks and traps" that remain after the Credit Card Accountability Responsibility and Disclosure Act of 2009 eliminated many abusive practices with credit cards.
Regulators charge that some deceptive enrollment practices can take place with "no interest if paid in full" products.
In 2011, a Pinckney, Mich., woman financed $5,500 for dentures using a 0 percent introductory rate. But she was hit later with a 22 percent rate and her bottom dentures weren't finished correctly. The dental chain, Allcare Dental, went out of business, and she was struggling to pay off more than $2,000 on that high-rate card.
Early in December, the CFPB announced an enforcement action against GE Capital Retail Bank and its subsidiary CareCredit. GE Capital didn't acknowledge any wrongdoing in consenting to the order.
"At doctors' and dentists' offices around the country, consumers were signed up for CareCredit credit cards they thought were interest-free, but were actually accruing interest that kicked in if the full balance was not paid at the end of a promotional period," the CFPB noted.
The promotional periods ranged from six months to 24 months, and the cards could accrue interest at 26.99 percent. If the patient did not pay the full balance by the end of the promotional period, the consumer became liable for all of the accrued interest.
More than 1.2 million consumers could be eligible for refunds totaling $34.1 million. Cardholders who meet the criteria for filing a claim will be sent a form from CareCredit within the next 120 days.
"Medical debt is already a big problem for many Americans. Poor credit card transparency should not be making the problem even worse," the CFPB's Cordray said.
Shoppers need to realize that some deferred-interest offers are easier to understand than others. CardHub did a 2103 deferred-interest survey of some offers and noted not all companies are clear about their policies.
Pay attention to what kind of plastic you sign up for. You still need to make monthly payments even during a deferred-interest promotional period.
"It's very hard to explain how deferred interest works to some consumers," Wu said.
That 0 percent can hook you to buy more and, if you're not lucky, leave you on the hook for paying much more in interest than you expected.