The Danger of No-Interest, Same-as-Cash Purchases

Written by nickel - 16 Comments

A few weeks back we purchased some furniture in a 12 months, no-interest, same-as-cash credit transaction. In short, this was a move made in the interest of convenience. We had just paid the movers with our credit card (to the tune of $7k) and were waiting on reimbursement from my new employer, and we were in the midst of shuffling funds from one bank account to another. Thus, when we were out and about and found the sectional that we wanted, we decided to just open a store credit account to save us another trip. I know, I know, opening unnecessary credit accounts isn’t good for your credit score. But that’s not the point of this story…

The point here is that these are really dangerous transactions if you don’t know what you’re doing. In our case, it didn’t really matter. We had the money, just not in the right place, and we were planning on paying it off immediately upon receiving our first bill. But when the bill came I noticed something interesting… (Maybe I’m just thick, but this was news to me.) Even though you’re not paying interest for the first 12 months, interest is in fact accruing. So not only do you have to start paying interest after 12 months if you haven’t paid off the balance, but you also have to pay back interest for the first 12 months.

In our case, the balance on the account was about $4500 and after just one month it had accrued over $100 in (deferred) interest. Wow, that would be a nasty surprise if you simply took the clerk (and big shiny sign) at their word and believed this to be a truly same-as-cash transaction. Of course, hidden away somewhere in the fine print is the word ‘deferred‘ — as in:

“Your horrendously high interest payments will be deferred until we have a chance to add interest onto your interest which was added onto your interest (and so on).”

So… If you’re thinking about buying something using one of the (not quite the) same-as-cash promos, be warned. You’re almost certainly going to get slammed if you don’t pay it off quick.

Published on August 3rd, 2006 - 16 Comments
Filed under: Credit Cards
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Comments (scroll down to add your own):

Yes it’s a buyer beware program. I use these all the time but you have to pay it off one month before the term is do just in case they say that they didn’t get your check. I have heard horror stories were the company said that they didn’t receive the payment and you get clobbered with all that deferred interest. I also take the point that I can make more interest on my money buy using this system so I do. I feel it’s like somebody is paying me to use their money. Of course that depends on if I can get a discount on cash or not.
Comment by mark ingle — Aug 3rd 2006 @ 8:44 am
Yeah, almost every program works that way when you finance through a store.

I spent about a half of an hour when I bought my television a few years ago confirming that they in fact did not start accrueing any interest until after the 12 months. I must have asked the same question in at least a dozen different ways. But, nothing I was signing said anything about deferred interest and the guy selling me the television said it seemed strange but it was actually a good deal.

I still paid it off early.
Comment by Blaine Moore — Aug 3rd 2006 @ 8:54 am
After my divorce I wanted a new bedroom set - I bought one I absolutely loved at a furniture store in town - I didn’t pay one single penny on it till it was almost a year old. I signed up for the no payment deal for a year and saw the interest accruing each month on the bill but I saved for the furniture all year, getting ING interest, and then I paid it off in full one month before the year was up. I think it’s a great deal. Of course, they are hoping you mess up and have to pay them hundreds of dollars interest. But not me!! ha!
Comment by Kim — Aug 3rd 2006 @ 10:03 am
Why pay it off right away? You’ve already taken the credit hit, so you might as well get something in return by stashing that money in a savings acct and then paying it off a month early. I’d call this the high-risk version of 0% BT’s.

Money Magazine also did a short story on these. They claim that opening these, especially at places like furniture stores is especially harmful to your credit because most are backed by “lender of last resort” types instead of well-known banks and FICO takes that to mean you are a higher credit risk because you had to go through them instead of going through a more reputable bank. No idea if that’s true though…
Comment by Herb — Aug 3rd 2006 @ 11:10 am
I’m responding to Herb’s comment. I bought my bedroom set four years ago and today I have an excellent credit rating. Taking out that furniture store loan didn’t seem to affect my rating in the slightest.
Comment by Kim — Aug 3rd 2006 @ 11:54 am
I suppose it’s the mix of credit rating stuff that makes the score go up or down. But I wonder if Kim checked her credit score right away, or she’s just reporting what it currently is 4 yrs later. I would think it would show up in 6 months, but it wouldn’t be a negative unless she didn’t pay it off under terms.

But I’m just conjecturing. I try not to buy anything with delayed payments, etc. Luckily, I haven’t had to purchase anything large (over $1000) after I moved into my condo. (I did buy a nice couch, but I paid for it with cash that I had reserved from settlement, so it doesn’t really count.)
Comment by mapgirl — Aug 3rd 2006 @ 12:59 pm
I completely agree that these arrangements are very dangerous for those who aren’t careful, which unfortunately is a good majority of the population in my view. We purchased about $3500 in furniture last summer from a large furniture store in Houston and did the 15 months no interest deal. Of course if we don’t pay it off by the end of the 15 months we get socked with that huge charge for the accrued interest, which the last I looked was at about 25.9% and up to $1100.

On the other hand, it has worked out well just letting that cash sit in a high yield savings for the last year. I figure by the time we pay it off we will have made about $150 in interest.
Comment by Hal — Aug 3rd 2006 @ 3:15 pm
A very dangerous yet tempting deal for many people. The store is not in business to lose money. Besides if so many people were not paying everything with credit cards and not having cash to pay for things then these types of deals would not exist.
Comment by Andrew — Aug 3rd 2006 @ 5:49 pm
I do not know how much of hit it would do to your credit score a few months after the purchase. However, I do know that for most of these stores, a customer paying cash is better than one financing. Due to this, we have had great success in negotiating a better deal on the furniture we have bought by offering to pay cash. Both times we have down this, we needed to speak to the floor manager to make the deal.

We recently purchased a nice over-sized couch for our small ‘media’ room, and were able to purchase the couch for 15% lower then the sale price due to offering to pay cash.
Comment by Medicated Money — Aug 3rd 2006 @ 7:56 pm
Yes, the interest is deferred, but it is accruing during the free period. And the interest rates on these deals are typically around 24% from what I’ve seen. We did take one of these deals for reasons similar to yours. We had the money, but not all in the right place. We played the game though. We moved the money for the payment into a money market account and let it earn interest for 5 months. The payment is going out next week.

The risk in all this is that you will spend that money on something else before that first payment is due. Even if you are only a little short, if you don’t pay off the loan in full before the end of the deferral period, you owe all of the accrued interest. I view this kind of deal the same way I view credit cards with a grace period on the interest. They provide me with the convenience of not having to have lots of cash or a high balance in my checking account before I go out to make a purchase. I still have to have the money to pay for it, or it will cost me much more.
Comment by Anonymous — Aug 6th 2006 @ 4:25 pm
However, I do know that for most of these stores, a customer paying cash is better than one financing.

Sometimes. On the other hand, customers with credit tend to buy more. A store that finances through a bank gets their money right away too, more or less, and the bank probably gives them a commission. (My sofa I bought from La-Z-Boy was financed through Wells Fargo.)
Comment by Jerry Kindall — Aug 8th 2006 @ 3:01 am
Wow, thanks for the warning. I’d never heard that before.
Comment by Purple_Kangaroo — Aug 16th 2006 @ 1:29 pm