Picture this: your refrigerator breaks down, and within a day, all your food starts to spoil. You don't have the cash on hand to buy a new one, but you can't exactly go without. What do you do?
A credit card with promotional financing might be the answer. Promotional financing can allow you to pay for big-ticket items with a credit card and pay monthly for a certain period of time, such as 6, 12 or 18 months, with interest assessed only if the promotional balance is not paid off within the promotional period.1 Although they can be financial lifesavers (or food savers, as in our example above) to manage unanticipated costs, they do require careful planning.
Two types of credit card promotional offers
It's not just private label credit cards that offer promotional financing for purchases. General purpose credit cards do as well, including, for example, promotional introductory rates for new customers and other promotional financing offers for existing customers. Some credit card issuers also extend promo rates for balance transfers. Many promotional financing offers fall in one of two camps: zero interest or deferred interest, both for a certain promotional period. Let's go over each.
No interest promotional financing offers
This type of financing may be advertised as "0% APR for 12 months," or however long the promotional period lasts. "APR" stands for "annual percentage rate," and it reflects the rate of interest you'll pay on your balance.2 And 0% is just what it sounds like: you won't pay any interest on that purchase for 12 months, or however long the agreed-to promotional period lasts.
It doesn't mean you won't pay anything on your card, though. You still need to meet the monthly minimum payment, which may be $25 and up.3 If you fail to make even one month's payment, depending on the card issuer, your promotional financing could be cancelled altogether (and you'll probably owe a late fee).4 Further, once the promo period is over, the interest rate that will be charged on the remaining balance is often on the high side, sometimes as high as 30%.5
Deferred interest offers
With this type of promo financing, which may be advertised as No Interest if Paid within 12 Months, or however long the agreed-to promotional period lasts, your card issuer will waive the interest you accrue if you pay your balance in full by the end of the promotional period. However, since interest accrues from the date of purchase or balance transfer, if you don't pay off the balance in full by the end of the promotional period, that accrued interest will be assessed and added to your balance. Depending on your purchase cost, that could mean shelling out significant finance charges you thought you wouldn't owe. And just like with zero-interest offers, the interest rate could be high. However, it will be assessed from the purchase date if the promo balance isn't paid in full by the end of the promo period. And just like No Interest Promotional Financing Offers, if you fail to make even one month's payment, your promotional financing could be cancelled. The credit card's terms and conditions will disclose whether so called "promo kick" is an attribute of the promotion.
3 tips to help you avoid pitfalls
When used with care, these promotional financing offers can be a valuable tool in any household's financial strategy. Here are some actions to consider:
1. Understand when the promotional period ends and consider paying off your balance a couple weeks prior to that date. Check to see if the required minimum payment is adequate to pay off the balance in time.
2. Make on-time payments throughout the promotional period. It's important not only for meeting the terms of your promotional financing, but also for protecting your credit score and steering clear of late fees.
3. Keep track of your promotional purchases or balance transfers on that card. If you have other purchases on the same card during the promotional period, make sure you understand how any excess payments above the minimum payment will be allocated. If excess payments are allocated to non-promotional balances, it could cause you to fall short of your final pay-off goal by the end of the promo period. Contact your credit card issuer if you have questions or would like the payments allocated differently as you may have some discretion.
Promotional financing with credit cards may make sense when you need to make a purchase in a hurry and want to pay for it monthly over time. As long as you keep on top of your payments and watch the calendar, these offers can be a boon for any budget.
This content is subject to change without notice and offered for informational use only. You are urged to consult with your individual business, financial, legal, tax and/or other advisors with respect to any information presented. Synchrony and any of its affiliates, including CareCredit, (collectively, "Synchrony") makes no representations or warranties regarding this content and accept no liability for any loss or harm arising from the use of the information provided. Your receipt of this material constitutes your acceptance of these terms and conditions.
1Irby, Latoya (2018, June 1). How Credit Card Promotional Rates Work. The Balance. Retrieved from https://www.thebalance.com/how-credit-card-promotional-rates-work-960226
2Consumer Financial Protection Bureau (2017, July 12). What Is a Credit Card Interest Rate? What Does APR Mean? Retrieved from https://www.consumerfinance.gov/ask-cfpb/what-is-a-credit-card-interest-rate-what-does-apr-mean-en-44/
3Tsosie, Claire (2018, July 23). How Credit Card Issuers Calculate Minimum Payments. NerdWallet. Retrieved from How Credit Card Issuers Calculate Minimum Payments - NerdWallet
4Merritt, Jessica (2018, May 17). What Happens When You Pay Your Credit Card Late. U.S. News. Retrieved from https://creditcards.usnews.com/articles/what-happens-when-you-pay-your-credit-card-late 5Wong, Kristin (2016, November 3). Here's How Zero-Percent Financing Offers Can Affect Your Credit. The Clearpoint Blog. Retrieved from https://www.clearpoint.org/blog/heres-how-zero-percent-financing-offers-can-affect-your-credit/