Be merry, and wary
Understanding credit card interest to avoid holiday debt drag
While you may be tempted to put your holiday expenses on a shiny new credit card, interest charges could sour your spirit. To avoid a holiday debt hangover, here are a few things to know about credit card interest:
1 Understand the offer
Here are the differences between common credit card interest offers:
Deferred interest: You won’t pay interest on your qualifying purchase if you pay it off in full during the promotional period. But if any balance is left over at the end of the promotion, you get charged interest for the entire amount of the transaction from the purchase date.
Introductory 0 percent annual percentage rate: No interest accrues on purchases you make during the promotional period. If you have a balance when the promotion ends, you’ll pay interest on that amount only from that date forward.
The National Consumer Law Center calls deferred interest offers a “deceptive bargain” and advises people to avoid them.
2 Pitfalls of deferring interest
Deferred interest offers carry risks and can get complicated. Drawbacks may include:
Higher APRs. The average APR charged in 2016 on credit card accounts that incurred interest was 13.56 percent, according to the Federal Reserve. But the average APR on deferred interest credit cards is 24 percent and can reach 29.99 percent, according to an NCLC report. When your promotional period ends and that APR kicks in, the interest payments can get expensive.
Confusion over interest. Generally, your original purchase qualifies for the deferred interest offer, as might any purchases made within a specific time frame. But additional transactions may be subject to different terms or APRs.
Minimum monthly payments may not be enough to pay off your balance by the promotion’s expiration date.
Above all, make sure you won’t be left with a holiday debt hangover. “You need to know if you can afford what you borrow under regular circumstances and even in worst-case scenarios,” says Bruce McClary, spokesman for the National Foundation for Credit Counseling.