What is deferred interest and is it a good deal?
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“Verified by an expert” means that this article has been thoroughly reviewed and evaluated for accuracy.
BLUEPRINT
Published 5:30 a.m. UTC Nov. 15, 2023
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Interest usually starts accruing as soon as you accept a loan, take a draw from a line of credit or start revolving a credit card balance. However, creditors sometimes offer options to defer interest payments for a specific period of time. A deferred interest offer might help you save money, but you need to read the terms carefully to avoid making any costly mistakes.
Deferred interest defined
Deferred interest is when a creditor lets you avoid paying part or all of the interest that would normally accrue on a purchase, but only if you pay off the balance during the interest-free promotional period. If you fail to pay off the balance within the interest-free period or fail to make payments on time, all the deferred interest may get added back to your account’s balance.
How it works
You might open a new loan or credit card with a deferred interest offer when making a major purchase or when faced with an expensive bill.
For example, perhaps you have to rush your pet to the emergency vet and are faced with a $3,000 charge. Thankfully, they’re OK, but you don’t have pet insurance and can’t afford the bill. So, you may opt to apply for and get a medical credit card at the vet’s office to cover the charge.
The card may have a 12-month deferred interest offer, which means you won’t be charged interest during the first year. However, if you can only afford $150 monthly payments, you’ll have a $1,200 balance at the end of the 12 months.
Because you didn’t completely pay off the balance during the deferral period, all the interest that was suspended since the vet visit gets added to your balance. Now, instead of having $1,200 left to pay, your balance will be much higher. And the entire balance will continue accruing interest at your card’s standard rate.
The Consumer Financial Protection Bureau (CFPB) found that 20% of healthcare purchases put on deferred interest cards or loans wound up incurring interest on deferred-interest financing offers between 2015 and 2020. People with credit scores under 619 — meaning people who would typically be considered to have fair or poor credit — were even more likely to be hit with back interest charges, potentially because they tended to receive shorter promotional periods.
Wells Fargo Active Cash® Card
Does my credit card charge deferred interest?
Deferred interest offers are common with specialty medical credit cards and medical installment loans. Outside doctors’ offices, you may find these offers on retail credit cards, such as big box stores that sell electronics, furniture or household goods.
You can also check your credit card statement to see if it has a promotional interest rate offer and review the offers’ terms. If you have questions, call the credit card issuer to clarify if and when you might have to pay interest.
Deferred interest vs. 0% intro APR: What’s the difference?
Promotional 0% annual percentage rate (APR) offers are much more common on credit cards. You’ll even find 0% intro APR offers on some of the best credit cards on the market, including rewards cards.
The main difference is that with a 0% intro APR offer, interest doesn’t accrue at all during the promotional period. With deferred interest offers, interest accrues but isn’t added to your balance during the promotional period unless you don’t pay off the balance within the promotional timeframe.
You’ll also see this difference in how card issuers word the offers. For example:
- Promotional 0% APR offers — no interest for X months.
- Deferred interest offers — no interest if paid in full in X months.
You should aim to pay off any balance before a 0% intro APR offer expires to avoid paying interest. However, if you don’t pay off the balance in full, back interest won’t be added to your account. Instead, any remaining balance will start to accrue interest at your card’s standard rate.
Pros and cons of deferred interest
Credit card deferred interest offers can lead to significant savings if you pay off the entire balance within the deferred interest period. But compare the advantages, disadvantages and alternatives before applying.
Pros
- Potentially an interest-free loan: You won’t have to pay any interest if you pay off the entire balance before the end of the promotional period.
- Pay off the debt faster: You may be able to pay off the balance faster than alternative financing options because your entire payment goes toward the principal balance instead of the principal plus interest charges.
Cons
- You could still have to pay all the interest: All the deferred interest could be added to your account if you don’t pay off the balance by the end of the promotional period.
- High interest rates: Accounts that offer deferred interest often have high interest rates. If you don’t pay off the balance in time, you might wind up paying more than if you had used a lower-rate credit card or personal loan instead.
- You could lose the deferral promotion early: You might lose the deferred interest benefit if you fall 60 or more days behind on credit card payments.
- Deferred interest deals can be misleading: The terms and conditions can sometimes be confusing, leading people to think they’re getting a no-interest offer instead of a deferred-interest offer.
Can I avoid deferred interest?
You should be able to avoid paying any deferred interest that accrues by paying off the loan or credit card balance before the promotional period ends.
Before you accept a deferred interest offer and make a purchase, you’ll need to figure out how much your monthly payment needs to be to pay off your balance before the promotional period ends. You may want to play it safe and plan to pay off the balance several months early, just in case something comes up and you have to make a few smaller payments.
Alternatively, consider consumer 0% APR credit cards and business 0% APR credit cards that have true 0% intro APR offers, not deferred interest offers. With such a card, you won’t accrue or have to pay interest on your purchases during the promotional period. And, if you have a leftover balance when the intro period ends, you’ll accrue interest from that point onward, rather than being charged interest on the full purchase amount from the date of purchase.
If you have a credit card or loan with a deferred interest offer, you can avoid paying interest by paying off the balance in full before the end of the promotional period and by always paying your bill on time. When that’s not a realistic option, you also might be able to avoid paying the interest if you can use a balance transfer credit card to pay off the deferred interest account’s balance.
Having a loan or credit card with deferred interest won’t directly help or hurt your credit scores. Your credit scores are based on the information contained in your credit reports, but that doesn’t include information about your accounts’ interest rates or promotional offers.
Still, a deferred interest account can affect your scores in other ways. For example, opening a new credit account and having a credit card with a high balance relative to its credit limit could hurt your credit scores. Making your payments on time and paying down the balance can help your credit.
An example of a deferred interest offer is a medical credit card that defers interest for 10 months. The card offer might say no interest if paid in full in 10 months, or something similar.
In this example, you can use the credit card to finance your medical bills over time without paying any interest, but only if you can actually afford to pay off the balance within that time period. If you can’t, all the deferred interest that’s been accruing gets added to your balance.
Using a credit card or loan that has a lower interest rate might be a better option, even if you have to pay interest from the start.
When a deferred interest offer ends, the creditor will waive the accrued interest if you’ve paid off the loan or credit card balance within that deferred interest promotional period.
However, if the promotional period ends and you still have a balance, the creditor will add the deferred interest to your remaining balance from the date of purchase. And, considering that credit cards with deferred interest offers tend to have high APRs, you could end up with an expensive interest charge.
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