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!