PhotoAs the holiday shopping season picks up steam, shoppers will likely be offered discounts online and in stores if they sign up for a retailer’s credit card.

Typically, they’ll include enticing discounts on store merchandise and additional perks like zero percent financing for six months.

"A lot of times this happens at the point of sale," Jill Gonzalez, a researcher at personal finance site WalletHub, told ConsumerAffairs.

What shoppers may not realize when they sign up for these cards is that some are store specific and cannot be used in other transactions.

"It's easy for the consumer to say, 'sure, sign me up.' And this time of year I think that's something stores really prey on," Gonzalez said.

Understand the terms

There's nothing wrong with getting a big discount, but Gonzalez says consumers need to understand the terms. If the terms say something like "special financing" or "zero percent interest if paid in six months," watch out.

"Those are code words for deferred interest plans," Gonzalez said.

Deferred interest means the interest does not have to be paid as long as the full amount is paid off during the agreed-upon period. If it isn't completely paid off, the full interest on the full purchase price is charged, as if the interest had accrued all along.

To illustrate, Gonzalez uses the example of purchasing an $800 TV set with a zero percent introductory rate regular credit card -- issued by Visa, Mastercard, Discover, or American Express -- or a store-branded charge card with deferred interest.

"If you have $20 left over on the balance at the end of a regular credit card's zero percent introductory period, you're only paying interest on that $20," Gonzalez said. "With a deferred interest credit card, you're not paying interest on $20, you're paying interest on the full amount you charged, in this case $800. Most consumers don't realize that."

As an experiment, Gonzalez asked a group of consumers to talk about store card offers and what they liked about them. About half said they liked the idea of getting a big discount if they signed up. The other half said they like the zero percent financing.

The more you know

"After we explained exactly how deferred interest works, 67 percent changed their minds and said they would not be likely to sign up for a store charge card.

Because store cards will accept consumers with "fair" credit, they charge more in interest. If you are not able to completely pay for the purchase in the allotted time, Gonzalez says your interest rate could be as high as 28.99 percent, nearly double the average rate on a regular rewards credit card.

Her advice? Don't sign up for a store card promising introductory zero percent interest unless you're sure you can pay the entire balance before the introductory period ends.

Government regulators have also taken note of how consumers can often be confused by "special financing" offers. Earlier this year, the Consumer Financial Protection Bureau (CFPB) urged retailers to more clearly explain how deferred interest financing offers work and implement more transparent credit card policies.


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