Have you ever been tempted to take advantage of an interest-free offer from a retailer? Just think… You’ve saved and saved for that new bedroom set, and now they’re offering you a chance to leave that money in your high-yield savings account so you can keep earning interest for 12 (or more) months while enjoying your new furniture. Sounds great, right?
Well… Maybe. While these “same-as-cash” offers can be a great way to save a few bucks on your purchase, you have to be very careful not to trigger an avalanche of interest payments. As it turns out, most of these offers have an extremely high interest rate (upwards of 20% or more in many cases) that is simply being waived if you pay it off during the interest-free period. But if you don’t kill off your debt, you’ll likely end up on the interest that has been accruing over the full period.
Consider the following… You make a $3,000 purchase under a 12 months, same-as-cash offer. At the end of twelve months, you’ve nearly paid off the full amount. You only owe another $200. No big deal. Even though it’s 20% interest, your balance is only $200, and it won’t take long to kill it off. Right? Wrong.
In most cases, failure to pay off the debt in full during the interest-free period means that you’ll wind up paying back interest equating to 20% on the full amount. Not such a good deal now, huh? Moreover, in many cases this interest avalanche can be triggered by a single late payment during the interest-free period. Thus, even if you fully intend to pay it off before the interest kicks it, it’s still possible to get caught unaware and wind up paying through the nose.
As with anything, be 100% sure to read the fine print.