Why financing can make or break your holidays

U.S. consumers have racked up an average of $33.1 billion in credit card debt during the last three months of each calendar year since 2009. That means an awful lot of people are likely to finance holiday shopping in 2013.

That alone isn’t too significant, as the busy holiday shopping period typically marks a large build-up in consumer debt that is at least partially offset by tax refunds and annual salary bonuses that come during the first quarter of the New Year. What is significant is that zero percent credit card offers seem to have peaked in value this year, which means holiday season 2013 could be your last chance to maximize your interest savings and expedite your timeline to debt freedom.

But depending on the type of zero percent credit card you opt for, you could be in for either big savings or big trouble.

Retailer deferred interest

Of the 70 percent of major retailers that offer some form of financing, 49 percent use a type of payment plan known as deferred interest. Such plans give you an initial period in which to pay for what you buy without finance charges accruing. If you’re debt free by the time regular rates kick in, great; you bought some time to pay for the holidays without paying extra. However, if any balance remains, the retailer will retroactively apply interest to your full original purchase amount, like the zero percent term never even happened.

You’re therefore taking a huge unnecessary risk by opting for a deferred interest plan, but the thing is you might not know that’s what you’re doing at the time. More than half of the major retailers that CardHub contacted for its 2013 Deferred Interest Study weren’t transparent about their policies, and almost none were found by undercover shoppers to adequately educate employees about the intricacies of financing options. An agreement’s fine print is often the only place where you can determine whether a zero percent offer uses deferred interest or not, and most people, unfortunately, don’t read it carefully (if at all).

That means what you might think is a relatively inexpensive holiday season could unexpectedly turn into something very different as a result of some unforeseen expenses arising months after the wrapping paper and tree have found their way out to the trash.

Just how expensive can deferred interest make things? Let’s say you spend $800 on Christmas gifts using a card that offers zero percent for a year and has a 20 percent regular interest rate. If it takes you 13 months to pay off that balance, a traditional zero percent credit card would charge you just a few bucks in finance charges. However, a credit card calculator shows that use of a deferred interest credit card would cost you around $100 in interest.

That's the type of holiday hangover we'd all surely like to avoid.

Traditional zero percent credit cards

Since the Great Recession, credit card companies have used lucrative initial rewards bonuses and lengthy interest-free terms to woo new customers who have exemplary credit scores. Unlike deferred interest cards, these great credit card deals actually provide a lot of value. The best zero percent credit cards currently on the market are the:

• Citi Diamond Preferred Card — This card does not charge interest on new purchases for 18 months and doesn’t charge an annual fee, making it the best option for financing upcoming expenses.
• Slate Card from Chase — Not only does this card not assess interest on transferred balances for 15 months, but it doesn’t charge either an annual fee or a balance transfer fee. It’s therefore a free balance transfer credit card, capable of saving you literally as much as $1,000 in finance charges and fees while enabling you to pay down what you owe faster than you would otherwise. Such a card is especially important if you’re like the average household (which currently has a $6,658 credit card balance) or you already opted for a deferred interest financing plan and want to get out of it.

Final thoughts

The holidays should be about family and fun, not financial concerns. So if you decided to finance the holidays through a retailer, check your agreement to verify that it doesn’t have deferred interest characteristics. If it does, try to transfer your balance to a card like the Slate from Chase. Regardless, make sure to budget as well as to use a credit card calculator to avoid splurging on unnecessary expenses and ensure a clear path to debt freedom.

Odysseas Papadimitriou is a personal finance expert. He is founder and CEO of CardHub, a U.S. credit card and gift card portal, and WalletHub, a personal finance social network.