What's The Truth About Those "No Interest/No Payments" Sales?

Factual Questions
21

I currently have two “zero interest” loans that I’m paying off. The first was for my LASIK procedure, the other for a new couch. Both basically involved getting a store / health credit card, and the cost was charged to it. The LASIK deal was “12 months no interest”. The sofa was “no payments for 12 months, no interest for 24”. I got both in March of last year.

I get a monthly statement for each card. The furniture card has “minimum payment: $0.00” (since I’m still in the “no payment” period), and the LASIK card has a minimum payment of around $50 (nowhere near enough to pay it off within 12 months). The statement also lists the “deferred” interest accrued. As long as I make the minimum payment, the interest is not added to the balance. I’m assuming that the deferred interest also includes the interest charges on the deferred interest. At the end of the special deal term , if the balance has not been paid off then all the retroactive interest is applied to the remaining balance, and interest then accrues each month until the charge is paid off. The interest also gets rolled into the balance if you don’t make the minimum payment or have a late payment.

The term expirations are handled on a per-charge basis. So if I went back to the furniture store and bought something with the same financing on my existing card, that balance is tracked with it’s own term, not the original item. I’m not sure how payments are applied to the individual charges in that situation, though. Ideally, you’d want payments to go to the older one, but applying payment to the newer charge may be one of the fine-print “gotchas” to get consumers to pay the interest.

There is no fee or penalty for paying off the balance prior to the interest free cutoff (I double checked this), and the LASIK charge definitely didn’t include any financing fees (the price was the same whether I financed through them or paid in full with check / credit). I can’t remember off-hand if there was a finance fee at the furniture store, I don’t have access to the paperwork from where I’m at to double check. I also don’t remember the exact interest rate (since I have absolutely no intention of paying any of it), but I think it was in the 20s%.

The catch is that you have to be dedicated to working the system. For a 12 month term, divide the price by 11 (just to keep some wiggle room), and make sure that you can afford that much each month. Get the payments in before the due date (online banking is really nice for this, since it’s generally faster and more reliable than mailing checks, and I can schedule to pay automatically so I don’t forget). And just because they claim you don’t have to make a payment doesn’t mean you shouldn’t send them money anyway.

The companies probably make their money in a couple of ways: first, there’s the fact that by making it easier for people to buy more high-end products, they sell more (and make more profit). Second, there’s the interest income from people who lapse in their payments. And then there are the financing fees (if included at all).

22

Just to add, UCC means the Uniform Commerical Code. It’s a standardadized set of rules for dealing with contract terms and contractual disputes. I believe most states have adopted the Model UCC with some states adding their own wrinkle or two.

23

Important thing to know about these “no-interest” deals, is that you are generally paying more for the merchandise than if you paid cash.

In 99% of cases it is not the store itself offering credit, they will have an arrangement with a finance company, who is providing the credit to the customer.

So how does the finance company make money you may ask, well apart from the small percentage of people who don’t pay off the loan before the interest free period ends, they receive a payment from the retailer for each contract, this generally starts at around $100-$200 per contract as a minumum.

So most retailers will have 3 or more prices for a particular item, there is the sticker price, the financing price and the cash price.

If you’re silly enough not to ask for a discount, the salesman will shut up and let you pay full price, if you do ask for the best price they can do, they will normally first ask how you intend to pay for an item, which will then dictate what price they give, because the retailer needs to include in their profit margin for the item the cost of paying the finance company for providing Credit if you opt for financing.

By the by, not sure about the US, but in Australia, most of these “interest-free” contracts still actually accrue interest over the period and it is charged to your loan contract if you do not repay the contract before the interest free period is over. And that interest rate is often 20% and higher. (I’ve persoanlly seen up to 28.5%).

24

I think a few states might actually include consumer protection provisions in or near their Uniform Commercial Code, but the UCC itself doesn’t have any provisions about prohibited terms (other than a few bits about warranties). Typically these are in the Consumer Protection Act (or whatever the state calls it), the Small Loans Act, Installment Sales Act, or some other similar provision. These statutes often include required disclosures, limitations on terms, plain language requirements, and all sorts of goodies like that. Certain federal laws also impose requirements (mostly disclosures).

As for how the no interest (or no payments) until ____ works for the creditor, here are a couple of examples:

Dell “No interest for six months”

Computers, Monitors & Technology Solutions | Dell USA

So you’ll have to pay for the item in full after six months or pay the six-months interest you thought you weren’t paying (which by the way, is apparently around 17-29%).

Crutchfield “No Interest, No Payments until 2009*”

(Emphasis added.) Close modal

Starting to see a pattern?

Empire Today "No Payments until April 2008

  • No Interest, No Finance Charges †"

http://www.empiretoday.com/modules/nopayment.aspx#nopayments

CareCredit:

http://www.carecredit.com/terms.html

25

When I moved into a new house, I did two of those “no payment no interest” deals with Sears and Bassett for appliances and furniture. At a time when cash was flying out of every major orifice (I have never wrote so many checks in a 30 day period in my life), it was nice to have someone say “Here, have the stuff now, pay us back when you can.” I liked the feeling of having the 2 or 3 grand sitting in my savings account rather than have to write another two big checks. I ended up paying them both off within the year with no interest, fees, or penalties. Just to be on the safe side, I called up customer service two or three times to verify I was on track.

26

Yep, this is the one that got me when I was a starving graduate school student in desperate need of dental work. Mercifully, I’ve blocked out the details of how badly I got screwed, but I do remember a breathtaking increase in the balance and an unimaginable interest rate. If you’re alert and organized enough to successfully manage one of these deals, my guess is you don’t need one.

27

Our credit ratings are in the high 800s. We have standard credit (credit cards, mortgage, home equity loans, car loans) as well…I don’t see this practice as being harmful in any way. I wish I could find my reports so I could give you the actual numbers, but both of us came up as excellent credit ratings.

28

We were in need of furniture, too. I wanted better stuff, since I’d had hand-me-down crap all my life. We took out a home equity loan for $5k (even though we had cash to pay for it) so we could write off the interest. That worked out well for us. I would never take out a home equity loan unless I had the funds to pay it off should disaster strike.

29

The FICO scale stops at 850. If you saw a score above that, you were looking at one of those bogus scores Experian sells, which aren’t on the same scale.
I’m glad your credit is good, and I expected as much, but that tidbit should be out there in the interest of fighting ignorance; it matters more for borderline cases than people who keep credit lines open for years and pay on time, like yourself.

30

I’ve never heard this before. Can you explain the difference and why Experian is bogus? I thought all the main reporting companies used the same scale, and that you were judged worthy or unworthy based on their numbers. What is FICO?

31

The bureaus all use a model that was created by Fair Isaac. Each bureau buys access to the algorithm and sells the score under its own brand name. The FICO is based upon the data in a credit report from one bureau, so you can indeed have more than one FICO. http://boards.straightdope.com/sdmb/showthread.php?t=254499&highlight=FICO

Here (http://boards.straightdope.com/sdmb/showthread.php?p=4827265&postcount=13) we talk a little about the difference between credit (FICO) scores and “consumer” scores, which are marketed to consumers.

Now you can get your FICO scores, too, but they aren’t part of the free annual credit report required by FACTA, most of the time, you have to pay for them.

Here’s a handy brochure: http://www.myfico.com/Downloads/Files/myFICO_UYFS_Booklet.pdf

32

Regarding **Mr. Slant’s ** point about sub-prime lenders. The category in question is finance companies (perhaps the best known company is Household Finance). Often the credit provider for no interest for x months deals, or for store credit, in general, turns out to be a third-party consumer finance company. “Individuals with too many consumer finance company accounts may also find their FICO scores negatively impacted, as such accounts are widely viewed as being debt traps from which consumers have difficulty escaping.” What is a FICO® Score? (with pictures)

I’m with **Slant ** here. Use store credit only if you can’t do it another way. It might not help as much as you think it does, and the terms can be pretty mean.

33

In Australia the deals are quite straight forward and I have used several. You actually sign a standard hire purchase agreement and IIRC even get the payment book. However the conditions state that if you pay the full amount by, say, January 20 2008 then no interest is payable. There have never been any other costs or fees involved. On each occassion I have done it I have bought something that I was waiting to buy in the next 12 months or so anyway - stereo equipment, computer stuff and a big TV. Each time I was able to take advantage of a sale and buy something I didn’t think I could own for a year. Each time the amount I paid a year later was the exact sale price interest free.

34

Doubt it, for the reasons GreedySmurf outlines. Every time I’ve ever shopped at a place that advertises this sort of deal I’ve bought for cash for a price massively less than the nominal sale price. The interest is just built into the ticket price.

35

We almost got dinged by one of these deals. When we bought our new house, we went to a furniture store and bought about 6K in new furniture. We had the money to pay for it left over from the sale of our previous house, but they were offering a one year no-payment, no-interest deal for a registration fee of $50. So basically, it’s $50 in interest on $6,000 for 12 months. Less than 1%. So I figured I might as well just leave my money in an interest-bearing account and take the deal, then pay it off when the 12 months are up, and make a couple of hundred bucks.

We were informed that when the 12 months was close, we’d get a statement that we could then pay off. Great. Except we never got one. So finally about 2 weeks before the anniversary of the purchase I phoned the company. “Oh, you should have gotten your statement by now,” they said. Right. They were probably hoping people who just forget, let the time run out, and then have to fork over 12 months of accrued interest at 25%.

Anyway, I told them I wanted to book an appointment with a credit officer so I could come in and pay it off immediately in person. Well, it turned out that the earliest we could get in was like a week and a bit later - dangerously close to the deadline, but still in front of it. So no problem.

We went in for the appointment, paid off the money, and left - and a few weeks later got a bill for all the interest. It seems that in the fine print somewhere it said that it could take 3-4 days to process the payment, and it was our responsibilty to make sure that we accounted for that, so tough noogies. Fork over $2000, please.

Anyway, I raised holy hell, and kept on raising it through various levels of the bureaucracy until they finally backed down and cancelled the charges. The cynic in me says they tried to play us - intentionally delaying everything, stalling on appointments, etc., to get us close enough to the deadline that their little 3-4 day processing delay could kick in.

So be careful. Be ULTRA careful. Don’t assume the nice person on the other end of the phone is giving you the straight goods. Don’t assume that assurances that they’ll notify you in plenty of time will actually be honored. If you pay, don’t do it by mail - it’s too easy for them to ‘misplace’ your payment until the due date expires and then blame the post office. If you must send a payment in by mail, send it registered and pay to get the delivery company to send you a receipt of delivery.

Of course, then you have to decide if all this risk and hassle and cost is worth saving a few bucks on interest. And be careful about those registration fees - a $99 registration fee on a $2000 12 month interest free loan is still 5% interest. Add in the risk of missing the deadline or the frustration of dealing with their shenanigans, and decide if it’s worth it.

36

Okay, I don’t have time to look in detail right now, but why, if the FICO score is the one that counts, are we not allowed free access to that? Seems a bit unfair, doesn’t it?

37

By the way, I went to the site and they do offer a 30-day freebie, after which time they’ll charge you $89 and change for a full year. The nice part is that they send you an email a week prior to the cutoff to remind you to cancel. I like that!

38

Yes, but you’d pay the same price at that place if you didn’t do the interest-free loan. Don’t all the major Big Box stores have competitive plans?

Incidently, I think we only did a Big Box purchase once with this. We don’t invest much in electronics, and when we do, it’s usually something small. We did a TV this way, but most of our purchases are much smaller. Most of my “no interest” purchases are household items: carpeting, windows, a/c, furnace…that type of thing.

39

BEGIN GQ
The current arrangement is a compromise.
You used to have limited access to the credit report itself, then Congress fixed that.
END GQ, BEGIN BORDERLINE GD
I’d say it’s unfair, yes. I feel that I should have free access to all information anyone has about me, excepting things that might threaten national security or ongoing criminal investigations.
Many Democratic legislators probably agree, many Republican legislators probably don’t agree. I won’t get into it any further in here.
We could also discuss the “black box” nature of the FICO score generator, and Congress has had hearings on that. If anyone wants links, I can dig some up.

40

We’re lucky we get any access to it at all, as far as FICO is concerned. Not so long ago, we didn’t (directly at least). FICO has consistently refused to answer specific questions about its model because it claims the model is proprietary. Congress has started asking questions a few times because FI still hasn’t spelled out exactly how its model works. The first time, we got the “Understanding Your Credit Score” pamphlet and myFICO.com. FI then issued a white paper that said, “what’s the problem? We’re educating people about this stuff–check out our pamphlet.” That worked for a while, but FI still contractually prohibited its customers (credit bureaus), and their customers (creditors) from sharing scores with applicants. This contractual restriction on disclosure of credit scores is one of the reasons that the “consumer scores” came about. At least you could pay a bunch of money for a score that sort of simulated your FICO, even though it had a different scale, and sometimes intentionally treated factors differently from the FICO model. Eventually, FICO got in the game by offering a FICO score estimator. What Is A FICO Score? | Bankrate and some other “watch your FICO score.” type services here.

Congress eventually got grouchy about that too. The rule finally changed with the Fair and Accurate Credit Transactions Act (an amendment to the Fair Credit Reporting Act). The FCRA required consumers to have access to credit reports, but not credit scores. FACTA, among other things, required credit scores to be made available–but not for free in most cases (sometimes a mortgage lender does have to give you your scores for free now). http://frwebgate.access.gpo.gov/cgi-bin/getdoc.cgi?dbname=108_cong_public_laws&docid=f:publ159.108.pdf

We’ve got all of that, but there are still insider claims about how various items work with the scoring model, gaps in knowledge, urban legends, and the like. As you can see from the pamphlet, FI isn’t much into sharing the fine details of its model with the public.