One of the unfortunate things about life is how surprise expenses can just pop up out of nowhere, forcing you to shell out a pile of money on short notice. Having a solid emergency fund is the best way of coping with unplanned bills. But according to SecureSave, 63% of American workers can’t cover a $500 expense out of savings, so it’s likely that you’ve had to find other ways to cope with a large bill or purchase.
One strategy is to take advantage of deferred interest financing — this is sometimes offered when you make a large necessary purchase like a home appliance. It is a pretty common feature of store credit cards. I’ve used this type of financing multiple times, but it’s best approached with caution, a calendar, and a little bit of math. Here’s how you can cover a large purchase using deferred interest financing — without risking a hit to your wallet.
How does deferred interest financing work?
Let’s say you’re making a big purchase, like a new washing machine. The one you’ve picked out costs $800, and you want some time to pay it off. So you apply for a store credit card that offers a year of deferred interest on purchases under $1,000. You won’t be charged any interest during that year, but watch out! If any amount of your payment remains unpaid when the time is up, you’ll be charged interest on the entire cost. Ouch.
Despite this drawback, deferred interest financing isn’t all bad. Since store credit cards often have lower credit score requirements than other credit cards, this can be a good way to make a big purchase if you have a lower credit score and lack the cash to pay for something outright. And if you make your payments in full and on time, you can even improve your credit score so you can qualify for better credit cards later.
Is this the same thing as a 0% APR offer?
Nope, it’s a bit different. A credit card with a 0% APR period will give you a set timeframe during which you can use the card and not earn interest on your purchases. After the period (which could be a year or longer) is up, any charges on the card will accrue interest at the go-to rate (check your card’s Schumer box for details).
However, unlike with deferred interest financing, if you make a large purchase with a 0% APR credit card and fail to fully pay it off during the intro period, you will not be charged interest on the entire purchase — only the amount of it that remains on your card when interest starts to apply.
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A 0% APR credit card is a great way to finance a large purchase, but these credit cards often have more stringent credit score requirements than store credit cards do. So if your credit score is a little shaky, you might have a hard time qualifying for a good 0% APR credit card.
A few tips for using deferred interest financing
All right, you’re ready to buy that washing machine with a deferred interest financing offer! Here’s how you can ensure your purchase doesn’t cost you extra money.
Do the math yourself
Don’t assume the minimum payment due is all you need to pay, because in most cases, it will not be sufficient to clear your debt before that pile of interest is charged on the whole purchase.
Your $800 washing machine might come with a $50 minimum payment, but paying just $50 per month for 12 months only covers $600 of your purchase. Boom, $200 is left at the end of a year, and you get charged interest on the whole purchase.
Don’t let this happen to you! Run your own numbers. Divide $800 by 12 months to arrive at an actual minimum payment of about $67. Pay that every month (and ideally more if you can), and you’ll avoid those interest charges.
Beware of using the card for other purchases
If you use your card for other items that don’t qualify for deferred interest, you’ll be charged interest on them immediately. And if you think you’re making payments toward your big purchase, your payments might be applied to the higher-interest purchases instead, thanks to laws about how credit card issuers apply payments. So perhaps give the card a rest while you’re paying off your big purchase to avoid this.
Lean on autopay
Consider setting up autopay for the minimum payment (or more) that you calculated. I don’t do this, because autopay makes me nervous — which isn’t to say it’s a bad thing! I just have a long history of living paycheck to paycheck, and not actively paying my bills myself every month gives me anxiety. But this is my own hangup, and I’m a firm believer in all of us needing to do whatever works to manage our own personal finances. So use autopay if it works for you!
Deferred interest financing can cost you extra if you’re not careful. Approach with caution and always do your own math to figure out how to pay off your purchase before interest is charged.
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