Money Talks, So Should You

How to handle zero-percent-interest offers

Knowing what you're signing up for could make the difference between a good deal and the poorhouse.

Roman Shteyn
by Roman Shteyn, MainStreet contributor

NEW YORK (Credit-land.com) — You could buy a big-ticket item such as a refrigerator, 60-inch plasma TV or furniture and pay no interest — as long as you pay it off within the time frame set by the lender. Those time frames vary and are usually a year or more.

But caveat emptor! Knowing what you’re signing up for could make the difference between a getting a good deal or ending up in the poorhouse. The Better Business Bureau encourages consumers to check out these zero percent finance offers carefully. The BBB says buyers should scrutinize the fine print on the sales agreement and make sure they understand all the terms and agree with them before signing up.

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Here are some important do’s and don’ts of zero-percent finance offers:

Pay off the debt before the promotional period ends. This is key. Being even one day late in paying off the debt could cost you a lot of money, because you could be charged for all the interest that accrued during the promotional period. This happens typically with furniture store cards. The actual interest rates on these type of financing deals are usually pretty high, some approaching as much as 30 percent. So depending on the cost of the product and the financing method you choose, you might be looking at hundreds of dollars in interest payments — even if you’re late by one day or just a few dollars short of paying it off.

Consider having the money available before signing up for the offer. This gets into the idea of making your money work for you. Say you were interested in buying a $2,000 refrigerator and you had the cash. You could put the money into a relatively high-interest-bearing account while you bought the fridge on credit. This would help you make some income off your money during the promotional period of this sale. Then days before the period ends you could pull your money out of the bank and pay off the debt. A lot of people get in financial hot water on zero percent finance deals because they enter into the agreement thinking they will be able pay off the debt on time and can’t.

Make monthly payments in full. This is the next best thing to having the funds available before making the purchase. Not making the fully monthly installment payment will cost you. In addition to the loan amount you must pay off by the end of the promotional period, you will be charged interest for failing to meet your financial obligations for that month. Here’s the bottom line: Don’t sign up for this deal unless you know you can afford to make the monthly payments in full or you have the money set aside.

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Understand how the offer will affect your credit and your rights. Most zero percent offers come with a catch. As the Better Business Bureau points out, some merchants will require you to take an installment loan with them rather than charging the purchase to your credit card. The BBB says this could affect your right to withhold payment under the Federal Fair Credit Protection Act if the product you bought turns out to be defective. To give you an installment loan, the merchant will run your credit. Too many credit inquiries can hurt your credit score.

Look at traditional credit cards with zero percent finance offers rather than store cards or lending agreements with merchants. The terms and conditions are spelled out clearly on these cards. There are no retroactive interest payments if you don’t finish paying off your balance by the end of the promotional period. And some offers give you up to 18 months to make payment. If you haven’t paid off the balance by the end of that period, you will be charged interest only on the remaining balance. Some also offer balance transfers with zero percent interest, so if you’re already running out of time on a purchase you made last year, that is another option to consider.

Roman Shteyn is co-founder of Credit-land.com. He writes frequently on personal finance and credit-related topics.

Roman Shteyn is co-founder of Credit-Land.com. He writes frequently on personal finance and credit-related topics.