What is Deferred Interest and Why is it Important?

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When it comes to the credit card world, “interest” is about as dirty as words get. Understandably so, as interest can snowball and result in a mountain of debt that’s hard to get out of. But, what about deferred interest?

Deferred interest is essentially interest you don’t have to pay for a set period of time. For example, if you have a line of credit with a deferred interest rate of 18 months, that means you won’t actively pay interest during that time.

Sounds pretty great, right? It can be! But, there is of course, a catch.

How Does Deferred Interest Work?

Deferred interest can be useful, as it can enable you to make purchases you otherwise couldn’t afford. Essentially, like any other credit card, only you’re not accruing a ton of interest — yet.

With deferred interest, there’s always a time period attached to it. Going  back to our above example, let’s say you have an 18-month period of deferred interest on a purchase. If you make a purchase, you’ll have no interest payments for that entire 18-month period.

However, during this time, that interest is still accruing. Once those 18 months are up, you’ll be hit with all of that interest at once. So, let’s pretend you have 18 months of deferred interest, a 20% APR, and you make a purchase of $2,000. If you make zero payments during that entire period, you’ll wind up with $338.02 of interest.

Once the 18 months are up, that entire amount will be added to your balance, and you’ll start accruing interest in real-time like a regular line of credit. This makes paying off that balance before the deferment period is up, all the more important.

Other Names for Deferred Interest Offers

When shopping, especially during any major holidays, you may run into deferred interest or deferred payment plans. Unfortunately, many of these will be masked with fun, branded names to make them more appealing. The following are a handful of the terms or names you’ll see thrown around during the holidays:

  • Zero money down: This one is often used at car dealerships, but can also be found at many big box appliance stores and electronics retailers. Sometimes these are simply zero money down, high APR payment plans. Other times, these can be deferred interest plans with absurd fees. No matter what, read the fine print.
  • Interest free: Again, this one will look appealing, especially as it sounds like there’s no interest at all. In most cases these are really deferred interest offers, so ask about the length of the period and what fees and interest rates you can expect.
  • Walk out with X today: It’s not uncommon to hear stores advertising an offer that lets you “walk out with a new TV today,” or “drive a new car home today” and so on. Sometimes these are deferred interest offers combined with zero money down, which can result in you walking out with something you can’t reasonably afford. Carefully read the fine print and make sure you’ve done the math before you agree to anything.

4 Easy Tips For Paying Off Deferred Interest

We’ve established that deferred interest, while useful, can get out of hand pretty quickly once that grace period ends. In order to avoid getting hit with interest, it’s important you have a plan to pay off your credit in a timely manner. To help make this happen, here are some tips on paying off deferred interest:

  • Do the math: It’s easy to get swept up in the offer of “zero APR” or “no money down,” but make sure you do the math ahead of time. Ask about the minimum payment due each month and how long the deferment period is. Then, crunch some numbers and see how much you’d have to pay each month to clear your balance before the deferment period ends.
  • Cut unnecessary spending: If you have several streaming services you don’t use or way more cell data than you need, etc. consider cutting back. Paying off your balance before the deferment period ends is essential to avoiding interest, so anything you don’t absolutely need should be trimmed from your monthly spending as quickly as possible.
  • Pay more than the minimum: After doing the calculations, you’ll know how much you need to pay each month to clear your balance on time. This monthly sum will be higher than the minimum, so stick to it and don’t allow yourself to simply pay the minimum. Those are generally set up to merely get you by until the period ends, at which point you’ll be slammed with all that interest.
  • Pay it off early if you can: There’s no reward for paying off your purchase right before the buzzer, so pay it off as quickly as you can instead. If you have a month where you’ve brought in some additional income, try making a larger payment to get ahead. You can’t predict the future, so paying off your purchase as soon as possible is always ideal.

Deferred Interest on Credit Cards

Beyond deferred interest on individual purchases at stores, there are also deferred interest credit cards. These operate like regular credit cards, but with one major exception: you don’t pay interest during the deferment period.

With a deferred interest credit card, you make a purchase and your interest on that purchase is deferred for however many months your card allows. Like a regular deferred line of credit, this can enable you to make large purchases and pay them back over a period of time. But, also like other deferred interest lines of credit, this can result in you getting hit with a large sum of interest at once.

More so than a one-time deferred interest purchase like those described earlier, a deferred interest credit card requires great spending habits. It’s easy to swipe your card and make purchase after purchase, so make sure you keep your spending in check.

Pitfalls of Deferred Interest

Sure, deferred interest allows you to make large purchases you otherwise couldn’t afford. That being said, it does have its share of pitfalls that you should be aware of.

  • Easy to get overwhelmed: When you’re using a deferred interest credit card, it can be easy to quickly find yourself overwhelmed in payments. This is especially true if you have a high credit limit. Even worse, if you don’t pay off your balance fast enough, the total interest of those purchases hitting all at once can be huge.
  • The interest rates can be huge: Speaking of huge interest rates, it’s not uncommon for deferred interest rate cards to have high interest rates. When looking at various deferred interest cards, see if you can find one with a lower interest rate just in case you do fail to pay off the charges before the deferment period ends.
  • There can be numerous fees: Deferred cards can include some hefty fees on top of the high interest rates. These fees are generally tied to late payments or failing to meet the minimum payment, so make sure you’re paying on time and paying enough.
  • The interest can include money paid: In some cases, the interest that comes after a deferment period won’t include the money paid off the total. This means you’ll still get hit for the full interest of a $2,000 purchase, even if you’ve paid off some of that total during the deferred period.

Deferred interest can be a great way to buy large items you otherwise couldn’t purchase. They can take away the stress of trying to save for months on end and enable you to buy what you want. Best of all, you can do it all without any fees if you pay off the credit before the deferment period ends.

Don’t fear deferred interest, but go into it with the right knowledge and preparation to avoid walking into something you can’t afford. Ask tons of questions, read the fine print, do the math, and don’t ever let yourself get sucked in by the buzzwords or sales pitches thrown your way at a store.

Save more, spend smarter, and make your money go further