Byline: David Bauerlein
Shoppers looking for ways to stretch their budgets might be interested in those widely offered "same as cash" promotions that charge no interest if payments are made on time.
If you play your cards right, it's an attractive offer because you'll have time - three months, six months, a year, two years - to make payments without incurring the interest charges that come from swiping a bank-issued credit card.
But shoppers have discovered the hard way that there is a costly side to those deferred payment plans. If you fail to make the payment on time, a steep interest rate kicks in. The rate will vary by contract, but it's usually 24 percent to 30 percent, said Anita McKinney, who teaches financial education courses for the Duval County Extension Service.
Even worse for your household budget, the interest rate will often be applied to your purchase from the day you bought it. It won't matter if you've already paid off some or most of the cost. You'll still be charged interest on the entire purchase amount back to day one.
"It's not cheap money if you don't pay it off," McKinney said. "That's the real pitfall."
Earlier this year, the Federal Reserve considered banning those no-interest payment plans but decided to allow them provided there is more disclosure to consumers. Retailers argued the "same as cash" promotion is an option that benefits consumers overall. For instance, Sears Holding Corp. said more than 70 percent of its customers pay what's owed before interest charges are added to the bill.
So how can you keep from falling into the group that gets whacked by finance charges?
For starters, understand what will trigger that charge being added to your bill. The promotion might say "No Interest if Paid in full 12 months." That's one deadline. But the contract also might impose the interest charge if you fail to make monthly payments during that 12-month period. Don't expect the company to cut you slack on the payment dates. Good intentions don't count. If you're not organized with your personal finances, the no-interest plan will probably come back to bite you.
Even if the contract doesn't mandate monthly payments, you should still budget regular payments so you're not caught short when the interest-free period ends.
Also, find out when the clock starts running on the interest charge. If it goes back to day one of the purchase, the finance charge will cost you more - maybe a lot more - than if the interest only applies to what you still owe after missing a payment deadline. For example, let's say the cost is $1,000 and you've paid off $500 when you miss the deadline. …