originally appeared in The Wall Street Journal:
The cards that many Americans swiped to bring Christmas cheer this year known as deferred-interest credit cards, could deliver a lump of coal in 2013.
Personal-finance experts are warning consumers that a failure to pay off just a few dollars of their purchases on some credit cards from Apple Inc., Wal-Mart Stores Inc. and other big-name retailers can leave them with major finance charges later on.
The deferred-interest credit cards offered by those stores allow customers to pay for purchases interest-free for a set period. But borrowers who fail to pay off their initial purchases in full by the end of the promotional period must pay interest on the original amount that they charged—even the parts they have already paid off.
The backdated interest is often at rates as high as 25%.
Deferred-interest credit cards are one of the worst abuses by credit-card lenders, according to a staff attorney for the National Consumer Law Center, which in the past has pushed for a ban on deferred-interest cards.
Under the programs, a borrower who bought a $1,000 computer with one of these cards who has even just a few dollars remaining at the end of their deferred-interest period could conceivably wind up having to pay hundreds of dollars in interest charges.
Such cards, which have been around for years, are pitched by retailers including Amazon.com Inc., Office Depot Inc. and Home Depot Inc. The programs give merchants a way to entice consumers to spend, and give consumers the ability to make a big-ticket purchase without having to pay anything up front.
The National Consumer Law Center, which has long called for a ban on deferred-interest cards, plans to urge the U.S. Consumer Financial Protection Bureau, the agency launched in 2011 to monitor credit cards, mortgages and other financial products for abusive practices, to propose rules that would restrict lenders from offering the programs. The group argues that legislation passed in 2009 known as the CARD Act intended to curb deferred-interest programs but regulators failed to do so when issuing the specific rules for carrying out the law's provisions.
A spokeswoman for CFPB declined to comment on whether such cards are on its agenda but said the agency has received consumer complaints about deferred-interest programs. She declined to say how many complaints it has received.
Lenders who offer the programs on behalf of retailers say they can benefit consumers by giving them a window of time to pay off purchases without finance charges.
General Electric Co., whose finance arm is one of the biggest issuers of store credit cards, says it takes steps to ensure transparency on the terms and conditions of its programs, which include cards marketed to customers of Amazon, Wal-Mart and others.
All billing statements for deferred-interest programs include details about the promotion, including the minimum principal payments borrowers are required to make each month, the expiration date and amount of interest that has accrued, a GE spokeswoman said. She added that two months prior to the expiration of the promotional period, consumers are alerted that the clock is ticking.
GE said the vast majority of borrowers pay off their balances before the promotional periods end.
The Amazon card, which offers six, 12 or 24 months of deferred-interest financing depending on the dollar amount spent or items a customer purchases when opening the card. Customers who don't pay off their balances in full incur a 25.99% standard APR on the full amount charged from the purchase date, according to the fine print included on the Web page advertising the card.
CardHub.com, a credit-card comparison website, cited the Amazon card along with several others for lacking transparent policies on how interest is charged in a study released earlier this year.
Amazon didn't respond to requests for comment.
"Deferred interest in my opinion should be outlawed," according to the chief executive officer of Evolution Finance, which owns CardHub.com. He says deferred-interest cards hide the true cost of financing.
CardHub.com's study found that more than 80% of major retailers offer customers financing options, and of those more than 60% offer a deferred-interest plan.
Apple, another retailer on CardHub.com.'s list of worst offenders, offers a deferred-financing card through Barclaycard, the credit-card division of Barclays PLC. The bank currently offers no-interest financing for six, 12 or 18 months depending on the size of a customer's purchase. The standard rate that applies after the promotional period ends is 22.99% on the amount they charged when they first opened the account as well as new purchases made going forward, according to online terms and conditions for the card.
Spokeswomen for Apple and Barclaycard declined to discuss the programs.
A research scientist in Cedar Rapids, Iowa, said he has a deferred-interest credit card through Apple, Best Buy Co. and Lowe's Cos. I've never had any issues, I only get these if I can pay it off, according to the scientist.
He uses his Lowe's card to buy supplies for home-improvement projects and the Best Buy card, which he is currently paying off, to buy a new TV.
Overall, I think it's a great deal for an astute consumer who knows what they're doing and can pay them off, he said. However, he said the contracts aren't well written and can be confusing.
A leading consumer-credit expert agrees deferred-interest plans can benefit consumers who know they have the money to pay off their balances before the promotional period ends. However, she recommends consumers consider opening a general-purpose credit card direct through a bank.
Many credit-card issuers today offer promotional 0% financing for as long as 18 months when first opening an account. The difference is such cards don't retroactively charge interest to past balances a consumer has paid off. Rather, the interest rate is applied only to any balance left at that time and new purchases made going forward.
It's a little more of a safety net just in case you can't pay the entire thing off, according to the consumer-credit expert. It still requires planning and forethought. But if there's a purchase you need to make and it's going to take a year to pay it off that could be a good strategy.
