Deferred Interest vs. 0% APR

Today we’re going to get into the nitty-gritty of credit cards… specifically those fun little intro rates we’re all constantly bombarded with marketing about. You've probably seen the terms "0% APR Intro Rates" and "Deferred Interest" all over instagram. They lure you in, promising no interest for a period of time. Sounds good, right? Let's slow down a bit and break down what these offers really mean.

A 0% APR Intro Rate means you won't pay interest on new purchases or balance transfers for a set period, typically 12-18 months. People often go for this option when they're planning a big-ticket purchase or looking to transfer a high-interest balance. The catch? Once the intro period is over, a higher APR kicks in, meaning you’ll have to start paying interest on the remaining balance. Companies aren't exactly broadcasting that part. 

Now, let's talk Deferred Interest. It sounds similar but there is a key difference. With deferred interest, you still get that interest-free period, but if you haven't paid off the balance by the time that period ends, you'll get hit with all the interest that would've accrued from day one. Ouch! This one’s often marketed for store credit cards, furniture financing, and the like. Companies are sneaky about it, presenting it as a 0% interest offer, but the devil is in the details.

People often think both options will back-accumulate all the interest if you don't pay off the balance by the end of the promotional period. But that's not the case. With 0% APR, you only start accruing interest on the remaining balance after the intro period ends. Deferred interest is the sneaky one that hits you with all the back-accumulated interest if you miss the deadline. 

So why would anyone pick deferred interest? Some people bet on having the cash to pay off the balance before the deferred period ends. It's a gamble, and not everyone's a winner here. You miss that deadline by even a day, and it's like stepping on a landmine.

The most important thing to take away– read the fine print. No, seriously, grab a magnifying glass if you need to, but understand the terms thoroughly. Set reminders to either pay off the balance before the deferred interest period ends or transition to a regular APR plan. Create a payoff strategy and stick to it. I can't stress this enough—don't let these companies trick you into debt. Being mindful of these pitfalls can make all the difference between empowering yourself financially and falling into a debt spiral.

Let’s look at the math:

0% APR Intro Rate Card

• Promotional Period: 12 months at 0% APR

• Post-promotional APR: 20%

• Balance at end of 15 months before interest: $5,000

In this scenario, you'd only pay interest on the remaining $5,000 for the 3 months after the 12-month intro period is over.

Here's how it breaks down:

• Monthly interest rate = 20% / 12 = 1.667%.

• Interest for 3 months = 3 x ($5,000 x 0.01667) = $250.

You'd owe $5,250 after 15 months.

Deferred Interest Card

• Promotional Period: 12 months of deferred interest

• Post-promotional APR: 20%

• Balance at end of 15 months before interest: $5,000

For the deferred interest card, interest has been accruing from day one. You just don't see it until the promotional period is over.

Here's how it breaks down:

• Monthly interest rate = 20% / 12 = 1.667%.

• Interest for 15 months = 15 x ($5,000 x 0.01667) = $1,250.

With deferred interest, you'd owe $6,250 after 15 months because the interest has been silently piling up from the start.

Make sense?

Keep an eye out for these tactics, and don’t forget: if something looks too good to be true, it probably is. Let's do this!