Zero-interest credit card? Buyer beware

Some of my best column ideas come from you, my readers. The example below was posted on my AskTerry blog at TerrySavage.com. It inspired me to do some digging, not only into this situation but into other credit card tricks.

“Terry, I purchased furniture at The RoomPlace three years ago on a 36-month interest-free promotion. I was given a $4,100 credit limit. I have made my payments (on time), always paying more than the minimum amount in an effort to build my credit (I am a single mom and I own a mortgage). When I went to make a payment today, I saw my balance went from $1,000 to over my credit limit at $4,300-odd dollars.

“I called Comenity, the issuer of my credit card, and they informed me that the promotional period ended on March 17, and because I didn’t pay the $1,000 balance prior to March 17, they added the accrued interest at an adjustable variable rate of 35.9% to my balance.

“I asked if they would allow me the three-day grace period if I paid the $1,000 and they said NO. I am beside myself — crushed and crying with this added debt. Is there any recourse? This seems like predatory lending at its best, or worst!”

‘Deferred interest offer’

I reached out to Ted Rossman, senior industry analyst at Bankrate.com and CreditCards.com. He explained that this “deferred interest offer” is a common practice of retail card issuers, which typically charge high rates over 30% anyway.

“Lenders dangle 0% interest for a time,” he says, “but the big catch is that when it’s deferred interest, if the full amount is not paid off before the clock expires, then the lender retroactively assesses all of the interest that would have accumulated back to the start of the period.”

In fact, this reader’s huge balance of $4,300 included interest from Day 1, even though she had been making regular payments; she just hadn’t paid off the full balance within the 36 months.

But not all zero-interest cards operate in this manner. Rossman often recommends “cards like the Wells Fargo Reflect and the Citi Simplicity, which have lengthy 0% terms on balance transfers and new purchases. With those cards, you’ll be charged moving forward on whatever is left after your 0% term, but at least they don’t go back and charge retroactive or deferred interest.”

Balance-transfer cards

This seems like a good point to bring up those zero-interest balance-transfer cards. You can search for them at Bankrate.com or CreditCards.com. The offers are tempting — at least 18 months of zero interest, offering you the opportunity to pay down those balances more easily.

But if you don’t pay off the balance during the “zero period,” the rate will jump to 28% or higher. Even worse, you probably didn’t close that old card and maybe even charged it up again.

Beware offers to help

With Americans carrying record card balances, there’s a fast-growing industry selling a service to “negotiate” your card debt to a much lower balance. But most ask you to stop paying every month and instead set money aside with them so they can negotiate an offer.

If you are paying at least the minimums, your score will plummet when you stop paying. And there’s no guarantee of a settlement at the end. But the companies get their fees anyway.

The only trusted source of very low-cost credit counseling, and potentially a repayment plan, is through the National Foundation for Credit Counseling (nfcc.org). If you call them at 800-388-2227, you will be connected with the nearest local office.

I’ll have more credit card “bewares,” including warnings about chasing rewards and credit “repair,” in the next column. There’s a lot that can go wrong.