What the Heck Does Deferred Interest Mean?

So many credit card companies and retailers offer a special promotion: "No interest for 12 months." Is it really zero interest? What are the terms and conditions on these offers?

The first thing to know: no one makes money charging zero interest. Credit card companies and financing companies aren't known for giving you anything for free or for choosing not to make money. So what's the trap?

Deferred interest is not the same as no interest

Most — if not all — of these promotions are a "deferred interest offer," not a "no interest offer." Here's the catch with deferred-interest cards: if you do not pay your full balance before the promotional zero-interest period ends, you'll be charged retroactive interest on the entire original amount. That can do a lot of damage to your finances, which is why deferred-interest cards are worth avoiding.

Deferred-interest deals entice shoppers by advertising 0% interest for a set period. If you pay off your balance in full before the promotional period ends, you're fine. But if you have as much as a cent left, you'll owe the remaining balance plus back interest on the whole purchase.

A quick example

Say you buy a $1,000 computer with a deferred-interest card that's interest-free for 12 months. If you still have $40 left after 12 months, you'll have to pay that $40 plus retroactive interest on the full $1,000 — as if the zero-interest deal never existed.

The takeaway: a deferred-interest offer is only "free" if you pay every last cent before the clock runs out. Mark the end date, and aim to pay it off early.