Especially during the holidays, retailers offer a “No interest and no payments for 12 months!” type sales pitch as a way for you to purchase that must have flat-screen television, bedroom set, or mountain bike without having to put any money down. For those strapped for cash, this seems like a perfect way to get what they want today and then pay for it down the road when, hopefully, their finances are in better shape.
What many people do not realize is that no interest, no payment agreements are frequently not the ideal solutions they may seem. Depending on the retailer and your ability to make timely payments once they come due, these types of agreements may result in you having to pay much more than you intended and can cause serious damage to your credit score.
To start with, even the most financially responsible consumer can see their credit score drop because they took advantage of a no interest, no payment sale. This is because in many cases you are opening a new line of credit with the retailer that, depending on if and how it is reported to the credit bureaus, may increase your credit utilization ratio.
Your credit utilization ratio is a substantial portion of the equation used to calculate your credit score. It is the total amount you owe divided by the amount of credit that has been extended to you. Experts suggest you keep your utilization ratio at or below 30%. The line of credit for your deferred payment plan, however, has a utilization ratio of 100% because the amount of credit extended to you is the same as the amount you owe. Depending on your other credit accounts, this could drastically increase your overall utilization ratio and consequently lower your credit score.
Aside from impacting your credit utilization ratio, deferred payment plans can include unexpected “strings attached” that catch consumers unaware and unprepared. For example, even though retailers may offer zero interest for a 12 month period, it does not necessarily mean you are completely off the hook. Retailers sometimes begin calculating interest on the purchase date instead of at the end of the non-payment period. When receiving their first bill, consumers are met with the unwelcome realization that they are responsible for the repayment of hefty interest fees in addition to the purchase price.
On top of this, consumers who are unable to make timely payments face the possibility of serious credit problems. Late payments can be reported to the credit bureaus and under the terms of your contract, may result in the interest rate on your purchase skyrocketing. In addition, even with plans where no interest was accumulated during the no-payment period, if you make even a single late payment, all of that interest may now be added to the amount you owe. What started out as a convenient way to make a purchase, may now involve high monthly payments, collections agencies, and a rapidly declining credit score.
If you are considering taking advantage of a no interest, no payment plan, make sure you understand all aspects of the agreement and read through the contract carefully. Know what interest rates you will be charged, whether or not you will be charged interest during the no-payment period, and what the penalties are for late payments. Only after having all the details will you be able to tell if a deferred payment plan is best for you.