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No Down Payment No Interest Until 2016!

That’s what the banner on the front of the Huffman Koos furniture website proclaims. If you’re in the market for a new bedroom set, for example, that probably sounds like a pretty good deal.

As always, though, the devil is in the details.

While interest-free financing deals are safer than they were a few years ago before protections under the Credit CARD Act kicked in, they still contain traps for the unwary.

To uncover those “gotchas,” I homed in on the terms of this particular offer, which are found in the fine print. Or maybe I should say I zoomed in on the terms since they were in really, really tiny print.

Here’s what it says:

The Huffman Koos credit card is issued by Wells Fargo National Bank. There will be no interest charged during the promotional period.

So far, so good. That’s about 36 months interest-free if you make your purchase near the end of 2012. It would be hard to find a credit card offer at 0% interest until 2016. And most 0% balance transfer offers charge a fee, which this does not.

Prior to the CARD Act, issuers would often promote 0% offers but then allow interest to accrue and apply it retroactively to the entire balance if not paid in full by the end of that time period. However, as the National Consumer Law Center points out in its report, Beyond the Credit Card Act: Features of a Safer Credit Card, “Interest that accrues silently and can be imposed retroactively cannot be described as ‘0% APR’ under the CARD Act.”

But that doesn’t mean retroactive interest is a thing of the past. While the CARD Act in general prohibits issuers from raising rates on existing balances, “there is sort of a loophole for deferred (interest) cards,” warns Lauren Saunders, managing attorney for the NCLC. Depending on how an offer is described, it may be possible for issuers to charge interest all the way back to the purchase date if the balance has not been paid off by the time the promotional period expires. That doesn’t appear to be the case here, but it’s something to watch out for when evaluating one of these offers.

If you make a late payment during the promotional period or if a balance remains after the promotional period, the regular APR will apply to the remaining balance. For newly opened accounts the regular APR is 27.99%. The APR may vary.

Uh-oh. That’s a very high interest rate to pay on any balance that remains after the interest-free period ends. And you’ll also be charged that higher rate on an outstanding balance if you are accidentally late with a payment. Consumers may not understand this risk, because under the CARD Act issuers generally have to give cardholders 45-days advance notice before a rate increase, but not in this situation. That means you have to be extremely careful to make sure your payments arrive on time every month.

However, thanks to the CARD Act, you must be at least given the opportunity to pay off the balance before the offer expires. The Federal Reserve explains:

If you made a purchase under a deferred interest plan (for example, “no interest if paid in full by March 2012”), the credit card company may let you choose to apply extra amounts to the deferred interest balance before other balances. Otherwise, for two billing cycles prior to the end of the deferred interest period, the credit card company must apply your entire payment to the deferred interest-rate balance first.

Minimum payments of at least 1/40th of the purchase balance are required during the promotional period.

Notice this is not a “no interest, no payments” offer. Those used to be common before the Credit CARD Act. But under that legislation, issuers are required to collect minimum payments during the promotional period. That is a good thing. It means you’ll be paying down the balance before the higher rate takes effect.

Still, the NCLC report points out that while consumers “make regular minimum payments during the deferred interest period,” those payments may not be “enough to pay off the balance during that period.” That’s, of course, what lenders are hoping for when extending these offers.

Minimum purchase to qualify of $2999.

While this may sound innocent enough, it’s one way retailers get you to spend more than you had planned. Suddenly you’re not just buying that dinette set you wanted, but you’re also upgrading your living room furniture or buying a new mattress on credit as well. Hey, it’s just a few extra dollars a month, right?

The kicker: cash versus finance pricing

Here’s where this particular offer really gets interesting. When you click on descriptions of some of the items listed on the site you’ll see two sets of prices: Finance Price and Cash/Charge Pricing

For example, this Aryanna 5 Piece Dinette Set can be purchased for $1147.00. But if you want to take advantage of the financing, you’ll pay $1499.00. That’s $352 more — or about 30% more — upfront!

Hardly a bargain. “It’s a way of disguising the cost of the credit,” says Saunders. “It’s like car dealers who offer you 0% but charge you more for the car. It’s really not 0%. It’s a much higher price.”

How to Make the Most of Interest-Free Offers

The best way to buy furniture, flooring or other home improvement purchases is to set aside enough cash in a savings account so that you can pay cash for the right deal when it comes along — whether you find what you want on clearance or on Craigslist. But you may come out ahead on these interest-free offers if you:

  1. Know the amount you’ll need to pay each month to pay the balance off before the interest-free period ends, and you are certain you can afford that each and every month. Just take the amount you spent with this offer and divide it by the number of months interest-free. For example, you buy $3000 worth of merchandise and have 36 months to pay it off before interest kicks in. $3000 divided by 36 = $83.33. Remember, the required minimum payment will often be smaller than this amount but you can pay more.
  2. Set up automatic payments for that amount each month so you don’t accidentally pay late one month and lose the 0% rate — or worse, get hit with interest retroactive to the purchase date.
  3. Don’t charge anything else on the card. Otherwise you’re likely to get confused about which portion of your payments is going toward the interest-free purchases versus the other ones you’ve made, and you’ll end up paying more than you planned.
  4. Do not finance anything that comes with a higher price for credit versus cash. Otherwise it is not really interest-free.

Have you taken advantage of interest-free financing for furniture, flooring or other items? How did it work for you? Share your experience in the comments below.

Image: Katy Warner, via Flickr

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