So I have this friend. Let’s call her Sherri.
Sherri is smart, funny, and generally good with money. But she made a really dumb decision last year… and she is STILL paying for it.
You see, Sherri got a raise and decided to treat herself to something nice – a new tv for her living room. She shopped all the ads and found a beautiful 54 inch flat screen on sale at one of the big-box electronics stores.
Even better – she could put it on the store’s credit card for 0% interest for 18 months. WOW!
Sherri drove to the store as fast as she could, already dreaming of what her favorite shows would look like on her new tv. In less than an hour, she was the proud owner of a new tv, a new store credit card, and $1894.87 in new debt.
But that debt was financed at 0% so it’s not so bad… right?
After all, she had a full 18 months to pay it off and not pay any interest. Who would turn down “free” money?
Sherri calculated she needed to pay at least $105.27 a month to pay it off in time. That was less than her raise was for, so no problem.
Month one and two were easy. She even paid a little more than the $105.27 she had to.
But… (you knew there was a but coming, didn’t you?)
… in month three, Sherri went out to eat with her friends and bought a new purse. She only had $75 to pay on the tv.
“That’s ok,” she told herself. “I’ll make up the difference next month.”
And she did.
But that same story played out many more times over the 18 months.
A trip to the mall…
A vacation at the beach…
Unexpected car repairs…
Guess what? When the 18 months was up, Sherri still owed $428 on the tv.
She didn’t have $428 to spare, so she paid what she could. When the billing cycle rolled over, that big-box electronics store charged $378.52 of back interest to her card.
So much for 0% interest. What gives?
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Sherri’s 0% financing was technically an interest-deferred account. That means the creditor keeps track of all the interest she WOULD have paid over the 18 months and charged it ALL to her when she did not have the balance paid off in time.
So instead of paying $1894.87 for the tv, Sherri will pay $2273.39, plus any additional interest accumulated until it’s paid off. Since the regular APR of the card is a whopping 22.4%, that’s a lot of interest!
And you know what… most 0% financing offers you see out there work the same way.
These financing companies KNOW that consumers are unlikely to pay off their balances within the time limit. They use the 0% offer to attract buyers like bees to honey. Then they just wait… to collect much more of your hard earned money when you don’t have it paid off in time.
Don’t get me wrong – 0% financing offers are not scams. The creditors just play the odds and end up making more on average than if they just offered a low financing rate because they know humans are procrastinators by nature.
Moral of the story – Free money in never really FREE.
It either costs time and effort to have the discipline to make the required payments…
It costs you a whole lot in deferred interest.
Your best bet is to SAVE money and pay for what you want in CASH.
If you do choose to make the 0% financing purchase, calculate exactly what you will have to pay each month to pay it off BEFORE the time limit. Then, set up AUTOMATIC payments from your checking account to pay the bill each month. Treat it like a do-or-die bill.
A few final notes about 0% financing offers from retail stores…
It may be “free money”, but there will be a cost to your credit score:
- Applying for the 0% financing counts as a credit inquiry. This will affect your score, especially if you have had other inquiries in the recent past.
- Whatever you charge on the 0% account adds to your total debt load, which recalculates your Utilization Ratio. The more “maxed out” you look, the lower your score will be.
- Every time you add a new account, your score goes down – at least for a little while. This effect is doubled or tripled if you have opened other accounts recently.
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This information is intended for informational and educational purposes only and not as legal advice. If you have concerns about your credit report, harassment, identity theft, illegal collections activity, garnishments, or property liens, you should consult an attorney who specializes in consumer rights and defense.