Managing your finances and credit rating is always a smart plan, and 0 percent introductory interest credit cards and deferred interest offers can be effective aids in this plan. However, you must be careful of the potential dangers when using these credit tools.
By Carlo J. Silvesti, CPA
Managing your finances and credit rating is always a smart plan, and 0 percent introductory interest credit cards and deferred interest offers can be effective aids in this plan. However, you must be careful of the potential dangers when using these credit tools.
Zero percent credit cards are generally used for transfers of credit card balances or loans with higher interest rates. The low rate is offered for a short period of time, and as with all credit cards and loans you must be aware of the terms and conditions that come with the offer. Here are some important points to consider:
Once approved for this low introductory rate, you will need to transfer the amounts on one or more existing credit cards to this new card usually within 60 days of receiving approval. You will need to plan to pay off the full amount of the transferred balances within the low interest introductory period. Any remaining balance after the introductory rate period will be charged the credit card’s stated interest rate, which will be significantly higher.
Potential Dangers in Using a 0 Percent Transfer Card:
A deferred interest borrowing program is often used to make large purchases, such as for expensive electronics or furniture. The borrowing needs to be paid off during the period of the deferral. If the borrowing is paid off during the specified period, then all of the potential interest is forgiven. If you do not pay off the borrowing in the time period provided, all of the deferred interest will come due, and you will be required to pay all that interest. When entering into a deferred interest borrowing program, carefully review all the terms and conditions.
Deferred Borrowing Example: You purchase $5,000 of furniture with credit terms of 24 months to pay it off. If you do not pay it off during the time period, you will be charged 23 percent interest on the full amount from day one.
Depending on the terms of the agreement, you may be required to make equal monthly payments to retire the debt during the deferral period. Know that there may be “minimum payment” requirements that do not retire the entire debt during the deferral period. Since the 2008 financial crisis, lenders must state the interest rate assessed from the purchase date. Some companies show the amount of interest deferred each month, that way you are aware of how much interest you are accruing and may owe if you do not pay off the full debt in time. In most lending programs, interest rates that are being deferred are usually 20 percent to 25 percent.
Potential Dangers in Using Deferred Interest:
Zero percent balance transfers and deferred interest borrowing can be effective tools when you make purchases. Just know that they are not without risks. Make sure you plan accordingly to meet the terms and conditions so that you don’t wind up paying more in the end.
Carlo J. Silvesti, CPA, is an associate professor of accounting at the Gwynedd Mercy University School of Business and Education. Prior to joining Gwynedd Mercy University, Silvesti served as a CFO and controller for 35 years at several small and midsize businesses. He can be reached at silvesti.c@gmercyu.edu.
Statements of fact and opinion are the authors’ responsibility alone and do not imply an opinion on the part of PICPA officers or members. The information contained in herein does not constitute accounting, legal, or professional advice. For professional advice, please engage or consult a qualified professional.