Survey: 72% of Shoppers Considering Financing Holiday Purchases Don’t Understand the Store Card Trap

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The holidays are coming and retailers are ready. Record holiday spending is projected for 2017 and retailers will woo shoppers with door busters, discounts and even “special financing” deals on store credit cards.

Cash-strapped holiday shoppers can be an easy mark for store card financing offers, which promise zero interest for a promotional time period. 

Yet, 72 percent of Americans considering using financing this holiday are not aware there is a costly catch to “deferred interest” promotions on store credit cards, a new CompareCards.com by LendingTree survey found.

Other key findings include...

  • Fifty two percent of respondents feel pressured to buy more gifts than they can afford with their paycheck or savings this year. Of those, 45 percent say they are likely to use a no interest deal to help pay for holiday shopping.
  • Millennials feel more pressure to spend more than they can afford on gifts than older adults. 68 percent of respondents under age 35 feel pressured, versus 45 percent of those 35 and older.
  • Forty three percent of respondents either don't know how long it will take to pay off their holiday bills, or expect to take six months or longer to pay them off.

The deferred interest trap

With a deferred interest credit card, if the balance is not paid off in full by the end of the promotional period, people are hit with retroactive interest on the total purchase amount back to the purchase date. They are even charged interest on the portion of the balance that has already been paid off.

To understand how Americans, approach store credit card special financing offers, CompareCards.com by LendingTree conducted a national survey of 1,000 American adults who said they would consider using a 0% APR for six months or longer to help pay for holiday shopping. The survey was conducted Nov. 6-8, 2017.

Most Americans don’t understand dangers of deferred interest

The National Consumer Law Center called deferred interest credit cards a “hidden time bomb” in a 2015 report. “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 retro- actively charge nearly $400 interest on the entire $2,500 dating back one year,” the NCLR says.

A 2015 Consumer Financial Protection Bureau study found that 38 percent of consumers missed paying off the balance for loans under six months in 2009 and 2010. That means they paid interest on their entire purchase, back to the purchase date.

Sadly, the CompareCards survey found a lack of understanding around the interest trap that comes with these credit cards.

  • A majority (72 percent) of Americans considering a 0% interest deal for holiday shopping don’t understand how deferred interest credit cards work.
  • Only 28 percent of consumers correctly answered a question about how interest would be charged when presented with basic “no interest if paid in full” store credit card terms. That's in spite of the fact that 56 percent of respondents correctly identified the definition of deferred interest. 

Store cards are different from major bank credit cards

Deferred interest deals are typically offered by retailers through their “private label” store credit cards. These are different from general purpose credit cards offered by major banks, which offer true 0% introductory interest periods. With a major bank 0% intro interest offer, consumers can take up to a year or longer to pay down a balance with no interest piling up or being dumped on their bill after the promotion period ends.

Many holiday shoppers will take on debt

Americans will take on debt to pay for holiday gifts this year, the CompareCards.com survey found. Many consumers are enticed by interest-free financing when faced with a big holiday purchase at checkout. But, unfortunately, it is these are the people who are most vulnerable to the deferred interest card trap.

  • Forty-three percent of respondents either don't know how long it will take to pay off their holiday bills, or expect to take six months or longer to pay them off.

 

Holiday shopping creates financial stress

Many Americans (53 percent) are dreading holiday shopping this year and others feel pressure to spend more than they can afford on gifts, the survey found.

  • Fifty two percent of respondents feel pressured to buy more gifts than they can afford with their paycheck or savings this year. Of those, 45 percent say they are likely to use a no interest deal to help pay for holiday shopping. 

Millennials feel more pressure to spend more than they can afford on gifts than older adults. Sixty-eight percent of respondents under age 35 feel pressured, versus 45 percent of those 35 and older.

Can be a money saving tactic

Not all deferred interest card experiences end in unexpected interest charges dumped on one’s bill. Over half (56 percent) of people who have used 0% interest deals in the past paid them off in full before the promotional period ended. If used properly, they can be a money saving tactic.

Yet, the National Consumer Law Center outlined one of the biggest risks to using a deferred interest credit card as “Life Happens.” If an unexpected life event like a job loss or serious medical condition means the consumer can’t pay off the purchase by the end of the promotional period, they will get socked with huge interest when they can least afford it.

Bottom line

Holiday shoppers are vulnerable to unexpected interest charges on deferred interest credit cards. These offers can save money when used properly, but many Americans don’t understand the interest trap these cards pose.

The survey shows that more education is needed, especially on the difference between store cards and major bank cards.  In addition to deferred interest deals, store credit cards typically have higher APR interest than major bank cards, less robust rewards rates, smaller sign-up bonuses (if any) and lower credit limits, which can hurt consumer’s credit utilization ratio.

Methodology

CompareCards.com by LendingTree commissioned Qualtrics to conduct a national survey of 1,000 American adults who said they would consider using a 0% APR for six months or longer to help pay for holiday shopping. The survey was fielded online Nov. 6-8, 2017.

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