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It happens every time you shop. You reach the register at your favorite clothing retailer, and they hit you with a sweet offer that goes something like this: "Sign up for our credit card, and you'll get 10% off your purchase today and pay no interest for 90 days!"
Score! Right? Well, maybe not so much.
The Consumer Financial Protection Bureau (CFPB) recently sent letters to retail credit card companies encouraging them to be more upfront about the strings attached to those special promotions — in particular, the ones that offer deferred interest. Why? Because it turns out consumers don't really understand what that means.
That's because deferred interest isn't the same thing as 0% interest. Here's how deferred-interest offers work: The retail credit card company (and yes, it's typically retail cards that are guilty of this) offers a promotion where for an introductory period — say, six months — you don't pay any interest if you pay your balance off in full in that time frame.
So you open your card in January, go gangbusters at the retailer until June, and rack up $2,000 buying new outfits. Fortunately, you have been pretty good about paying off your balances each month, and by the time June rolls around, you only have an outstanding balance of $50.
Here's the rub: Because you didn't pay off all the debt within the promotional period, you're now going to be charged interest on the full $2,000 — not just the remaining $50. (And that's compounded interest, which means you're charged interest on top of interest for each month that you made purchases.) D'oh.
By contrast, if your card had a 0% offer for six months, you'd only pay interest on that outstanding $50.
See the difference? The CFPB says one way to tell if you're getting a 0% offer or a deferred-interest offer is to look at the language. If you see the word "if", it's most likely a deferred-interest offer — as in, "No interest if paid in full in six months," versus "0% interest for six months."
Now that you know, we hope you'll be more inclined to give the person at the register a polite "no thanks" the next time you're tempted to sign on for a new card.