Consumer Comeback Blog

5 Problems with No-Interest Financing Offers

Written by Jeffrey Trull

no-interest-financing-cashYou’ve likely seen no-interest financing offers in stores or when shopping online. They’re common at places like Best Buy, which advertises these offers on its website. While they aren’t necessarily scams, they can be a bad deal for consumers.

Most of these offers are actually financed by opening a new credit card account. Shoppers won’t pay any interest on purchases, but only if specific terms are met.

While no interest may sound like a deal for those who can’t afford to pay the purchase price up front, there are often many “gotchas” with these offers. While some of the terms are very clear (Best Buy states many in plain English), consumers who don’t read the fine print might not realize what they’re getting into.

Here’s why you need to be careful with no-interest financing offers.

1. Damage to credit

These deals can damage your credit score, and the impact might be felt immediately, too.

Many no-interest financing offers open a new credit card and place a big balance on the card right away. The problem: This affects the credit utilization rate, which influences about 30% of the average FICO score. Increasing credit utilization, which is often the result of no-interest financing, can negatively impact credit scores. The problem can get worse, too, if balances balloon when the purchase isn’t paid off in time.

If you don’t make payments on time, the usual problems from late payments apply, too.

2. Must make minimum payments

Due to to the Credit CARD Act, most retailers that offer no-interest financing require monthly minimum payments. This means even though interest isn’t charged as long as the terms are met, you must still pay a minimum amount to avoid penalties or credit damage.

Some cards might stipulate that if a payment is more than 60 days late, you lose the no-interest period immediately.

The good news: required minimum payments can benefit consumers. This forces payments on the balance and may prevent consumers from forgetting about the loan until it’s too late.

3. Must pay balance in full

The biggest risk for interest-free financing is many offers require the balance be paid in full by the end of the promotional period or interest is charged. The catch: interest charges go back to when financing began.

Think of it this way: interest is really adding up in the background during the no-interest period, you’re just not being charged for it — yet. If you don’t pay the full balance, you’ll typically be responsible for all of these charges, losing the benefits on no-interest financing.

Many of these cards come with high interest rates, too. For Best Buy’s Reward Zone Credit Card, standard APRs are 24.24%-27.99%.

4. Differences between original purchases and new ones

Since many no-interest financing offers are actually credit cards, cardholders can charge other purchases on these cards. But new purchases often aren’t exempt from interest. This can complicate payments and will effectively create two separate balances — one for the initial zero-interest purchase and one for regular purchases.

Due to the Credit CARD Act, card issuers must apply payments above the minimum to the balance that carries the highest interest first unless you request otherwise. This means you won’t be paying down your 0% interest purchase until balances for new purchases are paid off.

5. Financing more than what’s affordable

As with all forms of financing, there’s the potential to buy more than you can really afford.

Many deals require a minimum purchase amount to qualify for 0% financing. Best Buy requires $429 in purchases to get no-interest financing for 18 months, or $899 for three years. The temptation may be to push your purchase over these limits to qualify.

How to come out okay

As with many cases presented on the Consumer Comeback Blog, you may want to steer clear of expensive financing offers like this by using cash instead. If you’re still considering these offers:

  • Plan to pay the balance far before the period ends. Don’t wait until the full amount is due and plan to pay a large lump sum. If you don’t have the cash on hand, you’ll have to pay interest as described above. Pay more than the minimum each month or cut up payments into equal amounts like a normal installment loan.
  • Don’t use the card for other purchases. Having different balances makes payments confusing. Avoid charging other purchases to these cards, especially since they charge high interest rates.
  • Consider alternatives. If you’re set on buying now instead of waiting to pay cash, consider using a different credit card. If you have access to 0% financing on another card or can just pay lower interest rates, you may pay less in the long run.

Have you used no-interest financing before? How did it work for you?

(image: 401(K) 2013)