I got a credit card promising no interest for a purchase if I pay in full within 12 months. How does this work?

Answer: If you were told that you do not have to pay interest on the purchase if the purchase is paid in full within 12 months, your card has a deferred interest plan. It’s important to understand how deferred interest works. Otherwise, you could end up having to pay the interest you thought you were deferring.

How interest is calculated: A deferred interest plan means that you won’t have to pay any interest on the purchase if you pay it off within the specified time frame – in this case, 12 months. However, if you haven’t paid off the balance or if you are more than 60 days late in making a minimum payment before the deferred interest period ends, you will be charged interest on that balance. Usually, the interest is calculated based on the balance you owed in each month since you first made the purchase. In this case, if you don’t pay the entire balance off in 12 months, or if you are more than 60 days late in making a minimum payment, you will be charged interest for each month on the balance you owed in each of the 12 months.

Here’s what you generally need to know about deferred interest plans:

  1. You need to pay off the full balance by the end of the deferred interest period, or else you could have to pay all of the interest that you expected to be deferred. That means you would owe all of the interest back to the original date of the charge.
  2. You still need to make at least your minimum payments when they are due. If you’re more than 60 days late making your payments, you could lose the deferred interest period. Note that a single late payment could have other consequences, like late fees.
  3. Your minimum payments probably won’t be enough to pay off the entire balance by the end of the deferred interest period.
  4. If you have other balances on the card that have a higher APR than the deferred interest balance, any amount above your minimum payment will be automatically applied to the balance with the higher APR. This changes in the last two billing cycles in your deferred interest period, when any amount above your minimum payment will be applied to the deferred interest purchases.
  5. If you use the card for other purchases, you might lose your grace period on those purchases if you don’t pay off the entire card balance – including the deferred interest portion – at the next payment due date.

Five tips for paying off your deferred interest purchase:

  1. Know when your deferred interest period ends. The front page of your bill shows when the deferred interest period ends. Your deferred interest period might have a different end date than your regular monthly payment due date.
  2. Pay more than the minimum each month.  Your minimum payment alone usually won’t pay off your deferred interest purchase before the deferred interest period ends. Calculate how much you’ll have to pay each month to pay off the purchase on time (or early, if possible). Consider doing this before you make the purchase so you know whether you’ll be able to pay it off in time.
  3. Ask your card company to apply anything you pay above the minimum monthly payment amount to your deferred interest balance. Your credit card company may not honor this request, but if it does, it may increase your likelihood of paying the balance in full before the end of the deferred interest period. This payment schedule changes when there are only two months left in your deferred interest period. At that point, if you pay any more than the minimum monthly payment, your card issuer must use that money to pay down your deferred interest purchases.
  4. Make your payments on time. It’s important to make your payments on time. Late payments can mean you owe all of the interest that would have been deferred.
  5. Try to pay off your deferred interest balance well before the deferred interest period ends. That way, you avoid having your payment take too long to arrive or forgetting to make that last payment. If you don’t, you will be charged interest on your purchase going back to the date you first made that purchase.
 
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