What’s wrong with “Same As Cash” offers?
It has such a nice ring to it…”same as cash.” But what exactly does it mean?
The meaning is actually pretty darn close to what it sounds like. If your credit is good enough (the legal term is “subject to normal underwriting standards”) you are given the opportunity to actually defer payments until some date in the future. And, if you pay the amount off in full before that predefined future date then you don’t have to pay any interest on the credit. How great is that?
From a consumer’s perspective it sounds like the best deal in the world. You make some sort of major purchase now like a Plasma TV, a new dining room table or maybe even an entire living room suite and you don’t have to make any payments for 6, 12 or even 24 months. This is called a “grace period.” And, if you do choose to make payments and you can pay the amount off in full before your required payments were supposed to begin then you only paid back the purchase price of the merchandise. It was interest free…. free money!!
So what can be wrong with that?
A whole lot can be wrong with that. Here are some things that the nice salesperson that sold you the “same as cash” deal didn’t tell you.
1. You are applying for new credit, which will result in a new inquiry and a new account on your credit reports. These can both lower your credit scores and lead to higher interest rates or declinations on other credit applications you make.
2. That new account is likely with a finance company (see my previous blog about how finance company accounts can lower your credit scores).
3. Interest rates from retail stores are normally very high even if you have excellent credit. The rate on the account is most likely higher than 20%. “But why is this a big deal” you ask. “This is a same as cash transaction. I’m not going to pay any interest!!” Here’s why…
4. If you don’t pay the balance off in full before the grace period ends then the interest will probably be retroactive back to when you made the purchase. And, it’s probably retroactive on the full purchase amount, not the amount you still owe. That means that if you bought a $3000 television but paid it down to $100 before the grace period ended you will still owe interest back to day 1 on the full $3000. Ouch!
5. And perhaps the worst reason to do a same as cash deal is that if you don’t make any payments during the grace period the balance on the account will never be reduced. That means that if you bought a $3000 television and didn’t make a payment for 12 months then you will have had that account on your credit reports, with the maxed out $3000 balance, for the full grace period.
This means that IF the account balance was hurting your credit reports and credit scores then it would have hurt them for the full amount of time that you didn’t make a payment. How would you know if it hurt your credit? You wouldn’t until it was too late. But, it would be safe to say that if you already have too much credit card debt then it would sting.
6. This is a great deal for the retail store. “How in the world can not getting a payment for 6, 12 or 24 months be a great deal for the store” you ask. It’s very simple. They’ve already gotten paid!! When you open up a new same as cash account you have essentially financed the purchase from a lender. The lender already paid the retailer the full amount, just like when you buy a house or buy a car. Now the lender is the one who is waiting for you to pay them directly. You’re not going to be making payments to the retail store. They’ve already been paid.
Retailers already make a decent markup on the merchandise (do you really think they paid $3000 for the television you just bought?). They make their money on the front end of the transaction in the markup of the merchandise. The lender makes the money on the back end. And, if the lender happens to be owned by the retailer then they’ll clean up on the front and back ends.
Plus, it gets you on the hook NOW for something that might have been less expensive when the grace period ended. That $3000 television that I bought will probably sell for $1000 in 24 months. But, it’s too late. I’m making payments on the higher price from 24 month ago.
7. Once the account is paid off you can still use the account at the store to buy other stuff and they will probably run specials on other same as cash offers. The home improvement warehouse stores like Home Depot and Lowe’s are great at this. When you take advantage of one of their same as cash offers you are opening up a new Home Depot or Lowe’s credit card account. You’re likely to use that card again and again in the future. They’ll clean up on the future use too.
So are same as cash deals ever a good idea?
Certainly. They are a good deal under the following circumstances…
1. You are not going to finance any major purchases in the next 12 months such as a car or a home. This way any negative impact to your credit reports and scores will have passed.
2. You are certain that a bank and not a finance company will do the financing. Again, read my previous blog and you’ll learn how to be sure to avoid this problem.
3. You don’t EVER let any balance go unpaid past the grace period. Even if you let $10 past the grace period you could get nailed for 20% annual interest all the way back to the day you made the purchase. Pay it in full 2 or 3 months before the loan “matures” just to be sure.
4. Unless you are very disciplined you might want to consider cutting up the new card they issue you and forget about it. This will ensure you don’t rack up a bunch of new debt that you didn’t plan for.
The bottom line is that you should consider using a credit card or a home equity line of credit that you already have open. Perhaps use a card that gives you cash back or airline miles. At least you’ll earn something for your trouble. You’ll be forced to make payments immediately but you won’t have any ill effects of inquiries or new accounts that will pop up on your credit reports. And, if you use a home equity account for the purchase then the interest could be tax deductible (verify this with your tax advisor or CPA)
Do you really think that these companies haven’t figured out how to make tons of money on same as cash offers? You should become familiar with the term “breakage.” It has a lot of meanings but its application to our topic is pretty unique.
You see, the marketing folks at all of these companies know that for every one (1) person who actually pays the full amount before the grace period ends there will be 5, 10 or even 100 people that forget to make payments and roll right into the “required payment” period. So, 100 people have “broken” for every 1 person who didn’t.
They’ll make a ton of money on those 100 folks. They’ll make so much, in fact, that they will forget about the 1 person who only made them the initial mark up on the merchandise.
Kinda makes you want to open up a television store doesn’t it?