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Teaser rate time bomb: Delayed-interest cards could be a good deal, but beware of fine print

Aug. 2, 2010 - 11:54AM   |   Last Updated: Aug. 2, 2010 - 11:54AM  |  
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Buy now! Pay no interest until 2013! Sounds appealing, right?

It could work in your favor, but you must read the fine print. And you must be disciplined in paying off the full balance within the specific time.

With many commercial store retail credit cards, if you don't pay off the entire balance within that time — or if you make a late payment — interest charges are tacked on retroactively. At interest rates of 25 percent to 30 percent, that means you'll pay just about double the cost of that computer or television over three years.

This is not the case with the military exchanges' credit card.

"It's the practice of the exchange credit program that there is no deferred interest," said Judd Anstey, a spokesman for the Army and Air Force Exchange Service, which manages the program for all the military exchange systems.

"They decided years ago to differentiate that card from other retailers' cards," Anstey said.

That means if you buy a television through a Navy exchange promotion at no interest for six months using the Military Star card, you won't be charged interest retroactively when the seventh month begins.

Sean Hannon, a personal financial consultant for the Virginia Joint Family Support Assistance Program, says that from what he has seen in the military community, commercial retailers offering low "teaser" rates are common.

When he taught a personal finance class at Langley Air Force Base, Va., he asked how many had used such teaser rates. Out of 45 people, seven raised their hands. People are using these rates mostly for high-dollar electronics, he said.

It's possible to come out ahead using teaser rates, but be careful. Some sensible options:

• Always make at least the minimum payment, and don't miss a payment. If you do, you'll be slapped with late fees — and even worse, that deferred interest.

• Stash away the entire amount in a savings account or certificate of deposit for those three years so that you can earn interest while ensuring you can pay off the balance.

• While you're making minimum payments, save enough each month to more than cover the balance at the end of the 36 months. For a $1,000 item, for example, saving $30 a month for 36 months would give you $1,080, enough to pay off the item with a little left over.

• Make more than the minimum payment each month.

• Pay off the item at least a month or two early, to be on the safe side.

Also, watch out for these common pitfalls:

• Don't charge anything else on that store card while you're paying off a big balance. Certain rules apply about allocation of payments and interest charges on your promotional purchase when you make extra purchases, so check the fine print if you do.

• Carefully scrutinize your monthly bills to make sure nothing has changed in the agreement.

If you don't pay off the balance within the required time, there are consequences. If you miss a payment at any point, the balance increases, with late fees and possibly a higher interest rate.

The ultimate cost of any item, Hannon said, "depends on how you finance it."

Do the math

Say you're buying a $1,000 television from a national retail chain, and the company's website is offering "no-interest" deals on high-definition TVs if paid in full within three years.

The deferred interest on that purchase — at an annual percentage rate of 25.24 percent — begins adding up as soon as you buy.

The required monthly minimum payment is $10 or 1 percent of the remaining balance, whichever is greater. The monthly minimum payment increases as the deferred interest continues to accrue.

According to personal financial consultant Sean Hannon, after 36 months, you would have paid $439.05. But because you hadn't paid off the full $1,000 at that time, you'd get zapped for the deferred interest. So even though you had paid several hundred dollars already, your remaining balance would shoot up to $1,484.42.

Tack on the $439.05 you've already paid, and that $1,000 TV is now costing you $1,923.47.

It can get worse. If you keep making minimum payments of $10 or 3 percent of the remaining balance, whichever is greater, Hannon says you'll need almost 22 years to pay off that $1,000 TV — at a total cost of $4,881.99.

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