With the expensive holiday shopping season fast approaching and credit card debt levels again on the rise, financing offers figure to be especially tempting in the coming weeks. One thing consumers must watch out for in this regard is a feature known as “deferred interest,” which is commonly found lurking in the fine print of retailer-branded payment plans.
Deferred interest financing is like a wolf in a sheep’s clothing, pairing an enticing offer for something along the lines of “0% interest for 12 months” or “special financing” with a clause that allows finance charges to retroactively apply to your entire original purchase amount if you make a late payment or leave even the tiniest of unpaid balances when the introductory deal ends. In contrast, most 0% credit cards will assess interest only on whatever balance remains when the introductory term concludes.
Suppose, for example, that you’re interested in opening a new credit card account to finance a couple of big-ticket items from your child’s Christmas list. Let’s say they cost a total of $800, and you believe you can repay that amount within six months in the absence of interest. But things happen and it ends up taking you seven months instead. With a normal credit card, you’d end up paying around $2 in interest (assuming a 20% regular APR). With a deferred interest credit card, however, you’d pay roughly 27.5 times more (i.e. $55 in interest), easily eradicating any Black Friday deals that you may score.
In order to help consumers avoid such an unfortunate financial surprise in a supposedly merry time of year, CardHub evaluated the financing options available through 49 large retailers. Specifically, we identified which retailers offer deferred interest plans, and if so, how transparent their websites are in presenting key information about the terms of such plans. Our analysis reveals that many retailers offering deferred interest financing are less than up-front about the true potential costs of these plans.
- 73% of major retailers offer a financing option. Of the major retailers that provide financing, 47% currently offer a deferred interest plan.
- Some big-name retailers – including Apple, Macy’s and TrueValue – are among the least transparent about their use of deferred interest financing.
- Disclosures are improving, evidenced by the average CardHub Transparency Score increasing from 6.9 in 2013 to 7.8 in 2015.
- 35% of the deferred interest credit cards are issued by Citi and 29% are issued by Synchrony Bank.
- Despite not having a deferred interest plan themselves, several retailers allow consumers to make payments through PayPal, whose “Bill Me Later” option has deferred interest.
- 29% of the retailers that offer deferred interest provide consumers with an alternative, whereby they can take advantage of a first-purchase discount rather than special financing. The average discount is 16%.
Average Transparency Score By Year
Transparency Scores By Retailer
Transparency Scoring for Retailers with Deferred Interest Plans
|Retailer||Location of “interest will be assessed from purchase date”||Readability of “interest will be assessed from purchase date”||Location of APR||Readability of APR||Total Points|
|Max 4 points||Max 2 points||Max 2 points||Max 2 points||Max 10 points|
|Tractor Supply Co.||4||2||2||2||10|
|Office Depot & OfficeMax||4||2||1||2||9|
|Toys R Us||2||2||1||2||7|
Deferred Interest Plans by Retailer
|Retailer||Previous Years Offering Deferred Interest||Offered Deferred Interest Plan in 2015||Deferred Interest Period||Regular Rate (After Deferred Interest)||Applies to:|
|AAFES||Not Offered||Deferred interest plan inactive.||N/A||10.24%||N/A|
|Ace Hardware||Not Offered||NO||N/A||13.99% – 22.99%||N/A|
|Amazon||2012, 2013, 2014||YES||6/12/24 months||25.99%||All items|
|Apple||2012, 2013, 2014||YES||6/12/18 months||13.99%-26.99%||All items|
|Best Buy||2012, 2013, 2014||YES||6/12/18/24 months||25.24%||All items|
|Dell||2012, 2013, 2014||YES||6/12 months||19.99% – 29.99%||Selected Items|
|Dillard’s||Not Offered||NO||N/A||22.99% – 24.99%||N/A|
|Home Depot||2012, 2013, 2014||YES||6/12 months||17.99% – 26.99%||Marked categories|
|JCPenney||2012, 2013, 2014||YES||36 months||26.99%||Jewelry, Furniture, Optical, Window and Custom Decorating|
|Lowes||2012, 2013, 2014||YES||6 months||24.99%||All items|
|Macy’s||2012, 2013, 2014||YES||12/24 months||26.99%||Furniture or Mattress|
|Meijer||Deferred interest plan inactive.||Deferred interest plan inactive.||N/A||19.99% – 23.99%||N/A|
|Menard||2012, 2013 in limited locations, 2014 plan inactive||YES||6 months||24.99%||All items|
|Neiman Marcus||Not Offered||NO||N/A||23.99%||N/A|
|Nordstrom||Not Offered||NO||N/A||10.9% – 22.9%||N/A|
|Office Depot & OfficeMax||2012, 2013, 2014||YES||6 months||25.99%||All items|
|Pottery Barn||2012, 2013, 2014||YES||12 months||26.99%||All items|
|RadioShack||2012, 2013, 2014||NO||N/A||N/A||N/A|
|Sears||2012, 2013, 2014||YES||6/12/24 months||25.24%||All items|
|Staples||2012, 2013, 2014||YES||6/12/18 months||27.99%||All items|
|Toys R Us||2012, 2013, 2014||YES||6/12 months||26.99%||All items|
|Tractor Supply Co.||2012, 2013, 2014||YES||6/12 months||25.99%||All items|
|True Value||2013, 2014||YES||12 months||13.99% – 24.99%||All items|
|Victoria’s Secret||2012, 2013 in limited locations, 2014 plan inactive||Deferred interest plan inactive.||N/A||24.99%||N/A|
|Walmart||2012, 2013, 2014||YES||6/12/18/24 months||16.90%- 22.90%||All items|
|Barnes and Noble||Not Offered||NO||N/A||13.99%-24.99%||N/A|
|The Sports Authority||Not Offered||NO*||N/A||24.99%||N/A|
|Game Stop||Deferred interest plan inactive.||Deferred interest plan inactive.||N/A||26.99%||N/A|
* Bill Me Later program from PayPal
The retailers we identified that do not offer any type of financing include: Bed Bath and Beyond, Ross Stores, AutoZone, Big Lots, Sherwin-Williams, Foot Locker, Radio Shack, Burlington Coat Factory, Michaels Stores, IKEA, H&M, Advance Auto Parts and Pet Smart. Meijer, Game Stop, AAFES and Victoria’s Secret don’t currently use deferred interest, but they reserve the right to do so in the future.
Applying for a credit card does not automatically sign you up for a deferred interest plan, but rather one will be offered to you based on creditworthiness and active promotions. Depending on the retailer, you may be able to use the plan just in store or for both online and in-store purchases.
In this year’s study, we selected 49 large retailers and analyzed the types of financing options that they provide to their customers. We collected information present on their product and disclosure websites and asked the retailers to confirm our findings. Where we were not able to obtain an official confirmation from the retailer, we called customer service lines. Information collected for this study was current as of October 12, 2015.
We analyzed the summary and main credit card pages associated with each retailer to determine A.) whether the retailers offer deferred interest and B) for those retailers that do offer deferred interest, how upfront and transparent they are in disclosing key terms associated with their deferred interest plans.
Based on this research, we identified four general types of retailers: 1) those not offering any financing options; 2) those offering financing options but not offering deferred interest promotions; 3) retailers that have deferred-interest-specific language in their disclosures but for which we could not find any specific information on active or previous promotions or that do not allow the consumer to apply for deferred interest plans online; and finally, 4) retailers who offer deferred interest promotions.
Only those retailers that offer deferred interest financing plans for personal use (not business) and provide detailed information about their offers online were scored. Retailers not offering any type of financing options were not scored or considered in our analysis. Retailers that included deferred interest language in their disclosures but for whom we could not find offers of deferred interest as well as those that did not allow the consumer to apply for deferred interest plans online were marked “N/A” and were not scored for this report.
Transparency for those with deferred interest was scored on a 10-point scale based on the location and the readability of the key terms associated with deferred interest plans. Key terms include:
a.) Language explaining that if customers do not pay their balance in full by the end of the promotional period, the standard interest rate will be applied to the entire original balance of their purchases retroactively from the purchase date.
b.) The standard APR that will apply at the end of the promotional period, and/or retroactively if the balance is not paid on time.
Generally, these two key pieces of information are present somewhere on the retailers’ websites or online disclosures. However, in many cases, the information was difficult to locate and understand. Since most consumers do not look far beyond a tag line advertising, “0% interest,” “no interest if paid in 12 months,” or “special financing for 6 months,” for example, the farther away the key information was from the tag line, the more misleading we considered it to be. Additionally, we considered the size of the font used to list the key terms in determining the “readability” factor. If the information was buried in a terms and conditions page, readability was automatically scored at zero since the size of the font does not matter if the consumer has very little chance of finding the information.
Specifically, the following criteria were applied:
1.) Location of language indicating “the standard interest rate will be applied to the balance from purchase date” (worth up to 4 points total)
- Directly under tag line advertising promotion (4 points)
- Not in close proximity but on the same page (2 points)
- Must access a secondary page to get the info (1 points)
- Terms and conditions page only (0 points)
2.) Readability of language indicating “the standard interest rate will be applied to the balance from purchase date” (worth up to 2 points total)
- Normal size font (2 points)
- Small size font (0 points)
- Terms and conditions page only (0 points)
3.) Location of APR that will apply at the end of the promotional period, and/or retroactively if the balance is not paid on time. (worth up to 2 points total)
- Close proximity to advertising tag line (2 points)
- Not in close proximity but on the same page or requires accessing a secondary page (1 point)
- Terms and Conditions page only (0 points)
4.) Readability of APR that will apply at the end of the promotional period, and/or retroactively if the balance is not paid on time (worth up to 2 points total)
- Normal size font – (2 points)
- Small size font – (0 point)
- Terms and conditions page only (0 points)
Retailers that did not offer deferred interest directly but allowed the “Bill me later” option from PayPal were not considered as offering deferred interest for the purpose of this report.
For added insight into the use and potential regulation of deferred interest financing plans, we turned to experts in the fields of law, business and consumer protection. You can check out our panel of experts, the questions that we asked them and their comments below.
- Do you see any problem with deferred interest financing? If so, what is the biggest issue (e.g. product disclosure, disclosure)?
- Do you think deferred interest financing should be a point of emphasis for regulators?
- What does the use of deferred interest say about the companies that employ it?