What Is Deferred Interest?
Deferred interest credit cards allow you to carry a balance from month-to-month, possibly without paying interest. Any balance you hold over time will accrue interest, but you’ll only actually owe that interest if you don’t pay off the balance before a certain date (when the deferred interest period expires).
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In the event you don’t pay your balance before the deferred interest period is up, all of the interest you’ve accrued over the given time period will be added to your balance.
Due to their structure, deferred interest cards have several benefits. But if you don’t know the specifics of how they work, you could end up paying a lot more in interest than you planned.
How Deferred Interest Cards Can Be Helpful
Using a card that defers interest allows cardholders to pay off larger purchases over time — without having to pay interest — so long as they pay off the balance before the deferred interest’s expiration date.
What is deferred interest and how does it work? Say you’d like to purchase a television that costs $1,000, but you won’t have enough cash to buy it outright for another two months. If you purchase the TV on a credit card that defers interest for 12 months with a 17% APR and hold that balance for two months, roughly $28.50 in interest will accrue, but you’re not technically liable for this interest just yet. You’ll only actually owe interest if you don’t pay off your balance before the 12-month deferred interest period is up.
So long as you pay off the balance within those 12 months, you would have essentially purchased the TV with an interest-free loan. On the other hand, if you forget about the deferred interest expiration date and go past it, you’ll end up owing $1,000 plus 12 months of interest. A deferred interest card will only save you money if you pay attention to the explicit rules that determine when and how interest is charged.
Good Habits for Deferred Interest Credit Cards
With any credit card, if your goal is to save money, you should avoid paying interest whenever possible. This mentality is no different with a deferred interest card, though it can be a bit easier to spend beyond your means when you know interest isn’t actually being added to your balance month-to-month.
One way to curb your spending is to keep track of your balance and how much interest is accruing along with it. Simply knowing how much money you owe — and how much interest you could owe — may be enough to prevent additional spending. This information will appear on your credit card’s monthly statement, and is worth keeping track of.
Another strategy for using these cards wisely is setting automated payments, for at least the minimum payment due. Because many deferred interest credit cards cancel the deferral period if a cardholder misses a minimum payment, an innocent mistake can end up costing hundreds of dollars in interest. Including missed-payment penalties and penalty APRs will put you in an even bigger hole.
It’s also wise to set a calendar reminder for a few weeks before your card’s deferred interest period ends. This way, the date will be on your radar — even if you can’t afford to pay off the entire amount.
Deferred Interest vs. Having an Intro/Promo Period
While deferred interest means that there is a period during which interest is not charged, if you do not pay off your balance within that period, you will then be charged all the interest that accrued during the deferral period.
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Discover’s promotional offers are different. When a Discover card features an introductory or promotional-period interest rate of 0%, no interest is charged during that period. So, when the introductory or promotional period ends, any remaining balance will begin to accrue interest from that date forward, but there is no additional interest related to the intro/promo period.