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No Interest For 12 Months Does Not Mean No Interest At All.

Contrary to what many people believe, when the ads for TV’s and other electronics come out every Sunday with headlines screaming “No Interest For 12 Months!“, the consumer is not actually getting 12 months interest-free. While you are not paying the interest on your purchase during that time frame, the interest continues to accrue behind the scenes on the total price…and if you do not pay off the product you bought in full before the end of the “interest free” 12 months, well, be ready for a big bill when they pile that accrued interest into your account.

To get these kind of deals, you normally have to sign up for a store credit card which usually pegs interest rates at anywhere from 20-29%, well above your average credit card rate. For instance, even my AA miles credit card from Citibank has the interest set at 19%, which is incredibly high. It doesn’t bother me any because I pay the bill off every month, but if I had to pay that amount of interest, I would not be using the card! So just signing up for a store credit card puts you in danger of paying more in interest than you have to. Let’s take a look at some math…

You decide to buy a new flat-screen TV in an electronics store for $1,000. You cannot afford to pay cash for it, so you see that the store is offering 0% interest for 12 months. YES! You can afford to pay $83.33 a month ($1000 / 12 months) to bring that new TV home today, so you sign up and get the store credit card. A few months go by and you are paying that $83.33 a month when suddenly you cannot afford it any more for whatever reason. You cut your payment down to $25 a month instead…and then your 12 months of “interest free” is up. Guess what? You did not pay off the entire purchase price of your TV and now the credit card has added up the interest accrued (ON THE PURCHASE PRICE, NOT WHAT BALANCE IS LEFT) from the day you bought it – which at 25% interest is another $250 you owe to the credit card.

So be careful of the “0% Interest For 12 Months” routine – while it can save you some money if you are very careful with your credit and your payments, too many people don’t pay off their purchases on time, costing them more in interest than they would have had to pay if they had just used their regular, lower-rate credit card!

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Comments (16)

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  1. Jeremy says:

    This is a good reminder. My wife and I got burned on this back when we first got married. The worst part is that we miscalculated by just a single month! The remaining balance was around $100, which was scheduled to be paid off in full when the next statement came. Unfortunately, for whatever reason, we should have made the last payment the month prior, because when our statement came, we saw nearly $400 tacked on the balance.

    I was furious. Of course, I had nobody to blame but myself. It was an 18-month promo, and at some point I either miscalculated how much we should have been paying each month, or thought we had an extra month when we really didn’t. Hindsight says we should have set up a recurring payment so that this couldn’t have happened. But, when you’re young, mistakes happen. It was an expensive lesson that shouldn’t happen again.

  2. devil says:

    We’ve used the no-interest deal several times. It works for us because we only buy what we can afford with cash. But, why use our cash now when we can just wait 11 months to pay? And, since I don’t like parting with large amounts of money, it gives me some time to get used to the idea. ;)

    I always pay off the bill 4-6 weeks before the grace period ends. And I send the check via certified mail, so the company can’t pull any funny business. Gotta be careful.

  3. Llama Money says:

    When i do one of these deals, here’s what I do. If the “interest free” period is 12 months, I’ll divide the bill by 10, and make that payment. The bill is paid off in 10 months, so there’s a huge margin for error. No worries about being whacked by a massive interest charge at the end.

  4. david says:

    Good ways to handle using it, good advice guys

  5. Mrs. Micah says:

    We just got one of those offers for a loan from some local bank. Not that we’d need the loan anyway…but looking at what the interest would be afterwards, doubly scary.

    I like the idea of dividing a 12 month period into 10 months of payments just in case.

  6. Annette says:

    I just bought all new windows for my home, and a surprising thing happened. When I indicated that I would be paying the bill in full (not the 10 months no interest deal), the salesman gave me a 5% discount – WOW! I wasn’t expecting it, but he said that they would have paid that much to the financing company.

    It probably wouldn’t work at every company, but this is a local firm, not a national chain. It would definitely be worth asking a company if they would give you a discount NOT to take advantage of the offer.

  7. david says:

    Always worth a shot Annette!

  8. Great warning – there sounds like there is little difference between ‘interest free’ and ‘pay no interest’ but of course they mean very different things. It just shows how very important it is to read the terms and conditions before signing up to anything.

  9. [...] My Two Dollars – No Interest For 12 Months Does Not Mean No Interest At All. [...]

  10. Kathy says:

    1) paying in cash can get you a deal — seeing those bills just does something to most people — they’re willing to drop the price to get that cash today than to get a larger amount 12 months from now.

    2) I’ve heard of unscrupulous salespeople adding on a warranty (even though the people had declined it), so even though they thought they had paid in full by the time it was due, they had not paid the $35 warranty (that they didn’t know about), so were charged the full amount of interest on the purchase price plus the warranty.

  11. david says:

    Thanks Kathy – I have not experienced the add-on warranty, but definitely one to look out for!

  12. PF Buzz says:

    No Interest For 12 Months Does Not Mean No Interest At All….

    Contrary to what many people believe, when the ads for TV’s and other electronics come out every Sunday with headlines screaming “No Interest For 12 Months!”, the consumer is not actually getting 12 months interest-free….

  13. [...] My Two Dollars – reminds everyone that no interest for twelve months does not necessarily mean interest free. [...]

  14. [...] David from My Two Dollars reminds us that No Interest For 12 Months Does Not Mean No Interest At All. [...]

  15. [...] that says, “no interest for twelve months,” wisely warns My Two Dollars, because No Interest For 12 Months Does Not Mean No Interest At All. The best way to buy something like this is to have the cash available when you want to buy it, [...]

  16. [...] Carnival of Personal Finance #153 was hosted at Money & Values. My post “No Interest For 12 Months Does Not Mean No Interest At All” was included. Thanks so much for [...]

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