On the surface those “no interest until XX date” payment plans seem like good deals. And they can be, for people who pay off the entire balance before interest kicks in.
Unfortunately, many people buy the merchandise and then forget about making payments. Then, WHAM!, they get hit with a lot of interest that has been accruing over time. With that deferred interest factored in, the true cost of the item you purchased balloons to something you never would have paid had that inflated price been stated on the price tag.
Welcome to the deferred interest trap — artfully and comically depicted in an episode of ABC’s “The Middle” sitcom that aired Dec. 30, 2009 and originally ran Oct. 7, 2009. Yes, no interest until (insert a date in the future when consumers are likely to forget about making payments) can backfire on you if you’re not careful.
The show chronicles the life of a struggling middle-class family living in Indiana and stars actress Patricia Heaton (who played the wife in the “Everybody Loves Raymond” TV series).
Her character, mom Frankie Heck, walks into the living room holding what appears to be a bill and declares to husband Mike (played by Neil Flynn): “Oh my God, Mike. It’s 2009.”
“What already?” he asks.
She says: “Yeah, Mike, 2009. How did this happen?”
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They both flash back to happier times when they came home excited and smiling with a microwave oven, TV and VCR — all new in the box — that they purchased with “no interest until 2009.” At the time, they said, “The economy is going to be great by then.” NOT. The family’s finances are teetering on disaster.
The mom says: “Great, now with interest we owe $650 on a VCR that we sold at the garage sale last year for two bucks.”
Since they are struggling financially, every penny counts. She says they can make if the dryer doesn’t break and second laters, the aging appliance takes its last gasp and tumbles over on the floor. The family then sets out of make cost-cutting measures in an effort to set their finances right.
I hope viewers use the scene as a teachable moment for themselves and their children who may have been watching. “No interest until” offers are really just gimmicks to help retailers move merchandise. Shoppers should realize this. The offers are great if you pay the balance off before the interest boomerangs.
We bought a new bedroom set for my daughter in 2006 from a furniture store chain with no interest and no payments until 2007. Knowing the trap that awaited us if we waited until 2007, we paid a little each month and then made a huge payment several months before the deadline so that it wouldn’t be hanging over our heads.
Here’s a tip: Set calendar reminders to yourself about the debt and the deadline by which you have to pay the balance off in full before interest kicks in. Set aside a certain amount each month and put it toward the debt. This keeps that obligation on your radar and makes it less likely you’ll go through the shock that TV show family experience.
To minimize the gotcha aspect of these schemes, federal banking regulators and lawmakers are requiring creditors to provide more disclosure about deferred interest plans, including the interest rates. The requirements are scheduled to go into effect July 1, 2010.
See related: Deferred interest, same as cash: Play the game right or lose, A comprehensive guide to the Credit CARD Act of 2009