Many retail credit cards offer zero percent promotional offers, and they sound like a great deal on the surface. Customers can buy what they want now, with no interest charges for six or twelve months, sometimes even longer. But there’s a catch. There always is.
The sales person may not always explain it, but the text is right there on your credit application or the terms and conditions of your credit card. If the balance is not paid in full by the end of the promotional period, the calculated interest will be added to your balance. Not starting the day after the promotion ends, but from the day the item was purchased. That’s an important detail that many people miss, or they don’t understand exactly how much it can cost them.
Additionally, retailers don’t provide any favors to help customers pay the balance in full by the end of the promotion. A minimum payment is required, but in most cases doesn’t come close to what would be needed to avoid interest charges. Customers get lazy, making only the minimum payment thinking they have plenty of time to make up payments later.
Earlier this year my wife and I purchased a sound system and a video projector for $1027.78 at an electronics store. We took advantage of a zero interest for twelve months promotion. What would happen if we made only the minimum payment for the duration of the promotion?
Interest Begins Accruing Immediately
It’s important to understand that interest calculations begin immediately. In the case of this specific creditor, the deferred interest is actually listed on our monthly statement. If the balance is not paid in full by the end of the promotional period, the deferred interest charges are added to the balance.
How Interest is Calculated
Interest charges are compounded daily using the daily periodic rate. The daily periodic rate is the annual rate divided by the number of days in the year. For this account the Annual Periodic Rate (APR) is 25.24% divided by 365 resulting in a daily periodic rate of 0.06915%. What this means is each day the creditor does the following:
- The daily interest is calculated by taking the previous day’s balance multiplied by the daily periodic rate (0.06915%)
- The daily interest charges is added to the balance
- Any payments made on that day are then subtracted
This could be done by hand, but is very tedious and mistake prone. Luckily, it’s easy to search for an online calculators to help with the math.
If I only made the $25 monthly minimum payment, at the end of the twelve month promotional period I would have made $300 in payments, but $250.13 in deferred interest would be added to my balance. The result would be a net decrease of only $49.87, and I would still have interest accruing on a balance of $977.91.
Obviously the zero percent interest promotion wouldn’t be a very good deal if I let that scenario play out. I have no intention of letting that happen though.
Preventing from paying a single cent in interest on my purchase takes three easy steps:
Ignore the Creditor’s Minimum Payment Amount
As illustrated, making the minimum monthly payments won’t even get close to paying the full balance by the end of the promotion. This number should be ignored.
Calculating the Real Minimum Payment
Calculate the amount that must be paid each month to eliminate the balance by the end of the promotion. Take the purchase price and divide by the number of months in the promotion. In my case, it would be $1027.78 divided by 12, or $85.65 a month.
We all have those months in which extra funds in the budget are helpful. By rounding your new minimum monthly payments up, customers can get ahead of the payment plan and create a little breathing room if needed. I rounded my monthly payment up to $100. So far I’ve been able to make my $100 payment each month, with only 3 months left until my balance is paid in full.
Zero percent interest promotions offer consumers the flexibility to make purchases that otherwise would have to be delayed by weeks or even months. But if the balance isn’t paid off by the end of the promotion, the purchase becomes extremely costly for the consumer.
Have you ever purchased something on a zero percent interest promotion? Did you pay the balance in full before the promotion ended?