Want the holiday/plasmaTV/new fridge, but don’t have the cash? You’ve seen the ads: buy it interest-free and don’t pay anything for 24 months – bargain!
But is it really a bargain? Let’s first look at the four main types of long-term “interest-free” credit schemes
1. Buy now, pay later: Get the holiday/TV/fridge now, and you don’t have to make any repayments or pay any interest during your interest-free period.
The catch: If you don’t repay it all within the interest-free period, the remaining balance will attract interest from the moment the interest-free period ends.
2. Interest free, but with instalments: Get the goods now, and pay them off in equal instalments over the interest-free period.
The catch: Any instalments you miss will attract interest, as will the remaining balance of your account.
3. Interest-free, with minimum payment amounts: Get the goods, pay a regular, minimum amount over the interest-free period, and then pay the remaining amount before the interest-free period expires.
The catch: If you only pay the specified monthly minimum, it probably won’t be enough to pay off the full purchase price before the interest-free period expires.
4. 0 percent purchase credit cards: These have an interest-free period on purchases (often 55 days), or a special promotional offer with a 0 percent interest rate for an introductory period.
The catch: An often high interest rate kicks in when this initial period ends.
When it works, it works
Choice did the sums and figured out that for large purchases (they use the example of a purchase worth $3000), if you have an interest-free period of three years or more, that could be a better option than buying with your existing credit card.
But in many other scenarios, interest-free periods can hang you out to dry. Here are 8 reasons why it might be better just to knuckle down and save up for the things you need.
In many other scenarios, interest-free periods can hang you out to dry.
8 pitfalls of interest-free periods
- The interest rate you pay when your period is over can be horribly high, up to around 29 per cent in some cases (compared to credit cards which are 12 to 20 per cent). So you need to make sure you’ve paid the whole amount off before that kicks in.
- Your credit provider might not warn you when your interest-free period is about to expire – so you need to check your statement for the details and set up a payment plan that will have the goods (or holiday) paid off well before time. The MoneySmart Interest-free deal calculator is a handy tool for working out a schedule of payments.
- You usually have to apply for a credit or store card to get the offer. Though you may be tempted to use the card (and get yourself into more debt, potentially at outrageously high interest rates), don’t.
- There are fees on these deals, like establishment fees, monthly account fees, payment-processing fees. Look for them in your credit contract. Also, if you miss minimum monthly payments, you’ll likely be up for penalty fees. You might even be penalised for paying off the contract early.
- Some deals don’t let you pay more than the minimum monthly amount, which guarantees you’ll be paying interest on the balance. Again, check the fine print and badger your salesperson with questions. (NB. Choice found the information given by salespeople can be patchy.)
- Often when you go for an interest-free deal, you can’t haggle over the price of goods like you might if you’re paying with your card or cash, and you probably can’t ask them to match a competitor’s advertised price.
- With interest-free travel deals that have set repayment amounts, missing a repayment might see your trip cancelled, with penalty fees deducted out of your refund.
- With 0 per cent purchase credit cards, the danger is not only that you won’t pay off the debt before the period expires and start attracting the revert rate of interest, but other types of transactions within the period may attract high interest (like ATM withdrawals). These cards also sometimes charge annual fees, late-payment fees etc. Check those Ts & Cs!
If you are in more debt than you bargained for, use our tools and resources to get on top of your finances and speak to your employer about ways they can help.