The following is a guest post by Matthew Malone of RothIRA.com:
It can seem irresistible. You’re browsing Amazon.com and your eye catches a Nikon camera with a 14.2-megapixel sensor and the ability to capture high-definition video. Your mind fills with thoughts of kids’ birthday party videos and flawless pictures of your next Caribbean vacation.
Too bad you don’t have the $550 to pay for it.
But then you see the “special offer”: 24 months of interest-free financing if you have–or sign up for–an Amazon credit card and pay the balance in full by the end of the two-year term. Paying off the $550 in two years averages $18 a month. You can almost feel your index finger pressing the shutter button.
It’s a fairly typical proposition. The Internet and television and newspaper ads are awash with such “no interest for…” offers for everything from furniture to new cars. Recent federal regulations have made it more difficult for companies to hide the details of the plans or make confusing disclosures. But even with the greater transparency, are those “special” deals really all that special?
In most cases, definitely not.
Let’s take the first, and most obvious, downside: what if you don’t pay it off in time? Things get ugly very quickly. Take that Nikon camera. Even if your balance is $1 at the end of the 24-month promotional term, you’ll be hit with 24 months of interest charges based on the original purchase price. In May 2012, the variable rate Amazon credit card had an astronomical 25.99 percent rate. At that pricing, $180 in interest would be added to whatever balance you still hold. And, of course, you’ll be paying interest on that interest as long as it sits on your balance. That $550 camera now cost you at least $730.
Let’s face it: no business offering a “no-interest” deal is looking to lose money. They’re placing a fairly certain bet that some percentage of customers won’t pay the bill during the promotional term. And they’re also signing up new credit card customers, and gaining the ability to charge interest on any purchases you make in the future. That long-term relationship is typically much more valuable than the money you save if you pay off the bill in time.
What’s more, the businesses can simply charge a higher price to make up for the “loss” of interest income. Chances are, you can get it cheaper elsewhere.
At the time of the Amazon promotion, for instance, the camera was selling on another site for $430. Even if you don’t have the cash up front to take advantage of the $120 savings, putting the purchase on one of your existing credit cards may be a better option. If you buy the camera for $430 on a credit card with an interest rate lower than 20 percent, and pay the same $18 a month as the Amazon scenario, it would take at least two-and-a-half years to rack up charges totaling $550 (the lower the interest rate, the longer you’d have to pay it off before blowing the savings).
If you do ultimately go for a “no-interest” deal, it’s essential that you make a plan and stick to it. The best one is to make any required minimum monthly payments and diligently put the rest in a high-yield savings account (in the case of the camera, you’d subtract the required payment from $18 and put the balance in the bank). A month before the end of the promotion term, pay off the balance. Most banks offer free bill pay services, so when you make the purchase, set up the payment to automatically be sent at a later date.
But the best advice is to simply stay away. “No interest for…” promotions are a good deal.
Just not for you.
Matthew Malone is a staff writer for RothIRA.com, a leading retirement and Roth IRA resource. Matthew is also a contributing writer to CBS SmartPlanet. His work has appeared in The New York Times, Cosmopolitan, Smartmoney.com, Fortune.com, Forbes.com, and other publications.