Holiday spending: Beware zero-interest financing

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(MoneyWatch) Retailers are pitching a variety of no-interest deals this holiday season, promising that you can buy something now and not pay a red cent of interest for six months, or even a year. But beware, says Odysseas Papadimitriou, chief executive of CardHub. Many of these supposedly free financing offers come with strings attached that could cost you dearly.

Moreover, few retailers are clear about the catch in their no-interest offers, so the high cost of "free" financing could easily take you by surprise. "When consumers see a no-interest offer, they tend to take that at face value, thinking they're gaining a true respite from finance charges for the advertised length of time," he says. "That's why [these deals] are so dangerous and reminiscent of the 'gotcha' type practices that were prevalent prior to the CARD Act."

That 2009 law, formally known as the Credit Card Accountability, Responsibility and Disclosure Act, protects consumers from a range of unfair and deceptive practices by card issuers.

Consumers traditionally go into debt for holiday spending, and supposed no-interest financing deals tend to encourage people to take on even more debt. "We don't need hidden costs adding to our problems," Papadimitriou adds.

The big "gotcha" in these deals is pretty consistent among dozens of retailers surveyed by CardHub, which provides consumers with information on different credit cards. The short version is this: If you don't pay every dollar of the debt before the "free" period expires -- or if you violate any other term of the agreement -- you not only pay interest on whatever balance is outstanding at that time, but also pay interest on all the debt retroactive to the first day you racked up a charge.

An example highlights just how costly that can be. If you borrowed $750 on a deal that offered 0 percent financing for six months, you'd probably figure that you'd never have to worry about the 20 percent interest rate on the credit card because you would pay off the bill before it came due. But if for some reason you didn't make the final $50 payment on time, instead of being on the hook for the roughly $1 interest charge that a $50 balance would require, you'd actually be charged $43 -- that's 20 percent interest on the balance going back to day one.

Not all retailers engage in this deceptive practice, Papadimitriou says. For instance, Costco, Norstrom, Dillard's and and Williams-Sonoma do not have so-called "deferred financing" plans, he says. 

But Wal-Mart, Victoria's Secret, Neiman Marcus, Pottery Barn, Best Buy and Apple all do. Worse, these retailers are not particularly up-front when providing consumers information about the plans, he says, which leaves consumers likely to be unpleasantly surprised.

For the terms of each of these deferred financing offers, check out CardHub's full survey here.

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