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Traps of 0% Interest Credit Cards

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0% interest credit cards are tempting but be sure to check out the fine print.  Just last week, the New York Times published a piece on 0% interest credit cards to warn consumers about some of their tricks and traps.

The cards, offered by many major retailers, promote the purchase of expensive items — like flat-screen televisions, furniture, jewelry or other expensive goods — with no interest owed during a defined period, typically from six to 12 months. The cards can help consumers pay for larger purchases over time.

But there’s a catch. If the purchase isn’t paid in full at the end of the promotional period, the buyer is charged interest retroactively, often at a very high rate. Sometimes, the interest is charged on the entire purchase price, even if the consumer has made partial payments toward principal.

The Times’ piece cites the National Consumer Law Center’s report on deferred interest credit cards, authored by consumer advocate Chi Chi Wu.  In the Report, found at https://www.nclc.org/images/pdf/pr-reports/report-deferred-interest.pdf, Ms. Wu explains that “no interest” or “0% interest” cards carry a “debt time bomb” at the end.  “Consumers who don’t pay off the entire balance before the promotional period ends will be charged interest retroactively back to the date that they bought the item, even on amounts that have been paid off.  For example, if a consumer buys a $2,500 living room set on January 2, 2016 using a one-year 24% deferred interest plan, then pays off all but $100 by January 2, 2017, the lender will retroactively charge nearly $400 interest on the entire $2,500 dating back one year.”

While 0% interest cards can no doubt be useful, consumers need to be educated on the serious consequences of not paying off the entire balance by the end of the promotional period.  So check out the disclosure statements and make sure you understand you may not really be getting a “no interest” deal.