Two offers that look the same
A true 0% APR promotion charges no interest during the promotional period. When it ends, the regular APR applies to whatever balance is left, from that day on. A deferred-interest promotion works differently. Regulation Z, the federal Truth in Lending rules, defines deferred interest as finance charges that accrue on a balance but that you do not have to pay, or that are waived, if the balance is paid in full by a specified date. The interest is building in the background the whole time. Pay everything by the deadline and it disappears. Leave a balance and the accrued interest is charged, going back to the date of purchase.
The CFPB's tip for telling them apart is one word: if. A 0% offer reads like "0% intro APR on purchases for 12 months". A deferred-interest offer reads like "no interest if paid in full within 12 months". The rules require that wording. Under 12 CFR 1026.16(h), an ad that says "no interest" for a deferred-interest offer must also say "if paid in full" and state the period, right next to the claim, and it must state that interest will be charged from the date you became obligated if the balance is not paid in full in time.
One purchase, worked out
Take an $1,800 appliance bought on a store card with a 12-month deferred-interest promotion and a standard APR of 26.99%. To clear it in time you need $1,800 ÷ 12 = $150.00 a month. The calculation below uses a simple daily balance approximation: the balance is treated as constant for each month, the payment lands at the end of the month, and each month accrues balance × 26.99% ÷ 365 × (365 ÷ 12) days, which equals balance × APR ÷ 12. Real statements use the actual daily balances and cycle lengths, so the issuer's figure will differ by a few dollars.
| Monthly payment | Left after 12 months | Deferred interest charged | Same plan on a true 0% card |
|---|---|---|---|
| $100.00 | $600.00 | $337.38 | $13.50 interest in month 13 |
| $125.00 | $300.00 | $300.26 | $6.75 interest in month 13 |
| $140.00 | $120.00 | $278.00 | $2.70 interest in month 13 |
| $149.00 | $12.00 | $264.64 | $0.27 interest in month 13 |
| $150.00 | $0.00 | $0.00 | $0.00 |
At $150.00 a month the balance is gone on time and the promotion costs nothing. At $140.00 a month you are $120.00 short at the end, and the card adds about $278.00 of back interest on top of that $120.00. On a true 0% card the same shortfall would cost about $2.70 of interest for the following month, because interest would start only on the $120.00 still owed. Paying $149.00 instead of $150.00 leaves just $12.00 unpaid and still triggers $264.64 of deferred interest. The charge depends on the whole year of balances, not on the amount left over.
Where the back interest comes from
Each month the issuer records interest on the balance but does not bill it. The CFPB's own example works the same way. In the $140.00 plan the first month accrues about $40.49, because the whole $1,800 is outstanding, and the last month about $5.85, because only $260 is left. The total is what lands on the statement after the deadline:
| Month | Balance during month | Interest recorded |
|---|---|---|
| 1 | $1,800.00 | $40.49 |
| 2 | $1,660.00 | $37.34 |
| 3 | $1,520.00 | $34.19 |
| 4 | $1,380.00 | $31.04 |
| 5 | $1,240.00 | $27.89 |
| 6 | $1,100.00 | $24.74 |
| 7 | $960.00 | $21.59 |
| 8 | $820.00 | $18.44 |
| 9 | $680.00 | $15.29 |
| 10 | $540.00 | $12.15 |
| 11 | $400.00 | $9.00 |
| 12 | $260.00 | $5.85 |
| Total | $278.00 |
Once the deferred interest is added, the regular 26.99% APR applies to the new, larger balance from then on. The CFPB notes that store cards may carry higher interest rates than traditional credit cards. The credit card payoff calculator shows how long the leftover plus the back interest would take to clear at a given payment, and the APR calculator turns a fee or a lump of interest into an equivalent yearly rate.
How your payments are applied
If the card also carries other balances, such as regular purchases at the standard APR, where your money goes matters. Regulation Z, 12 CFR 1026.53, sets the order for any amount you pay above the minimum:
- Normally, the excess goes first to the balance with the highest APR, then to the next highest.
- In the two billing cycles before the deferred-interest period ends, the excess must go first to the deferred-interest balance.
- At any time, the issuer may, at its option, apply your payment the way you ask. A preprinted term or a pre-checked box does not count as your request.
The practical consequence is that new purchases on the same card can soak up your extra payments for most of the year. The CFPB suggests asking the issuer to apply extra payments to the promotional balance. Keeping the promotional purchase alone on the card avoids the question.
How to use a deferred-interest offer safely
- Find the exact end date on the statement, not just the number of months.
- Divide the purchase by the number of full billing cycles before that date and round up. Ignore the minimum payment, which the CFPB says is usually too low.
- Set an automatic payment for that amount. One late payment can matter: Regulation Z allows the terms to charge interest from the purchase date if the account is in default before the promotion ends.
- Do not add other purchases to the card during the promotion, or ask in writing that extra payments go to the promotional balance.
- Aim to finish a month early. Statement timing and rounding can leave a few cents that cost the full back interest.
If you cannot be sure of paying it off in time, a true 0% offer or an ordinary installment loan is the safer comparison. The loan calculator shows the payment and total interest of a fixed loan for the same amount. Related reading: buy now, pay later explained covers short pay-in-four plans, and the credit card grace period covers how ordinary purchases avoid interest.
Frequently asked questions
What is deferred interest?
Interest that builds up on a promotional balance but that you do not have to pay, or that is waived, if you pay the balance in full by a set date. Regulation Z defines it that way. If any of the promotional balance is left when the period ends, the interest that accrued from the date you became obligated for the purchase is charged.
How do I tell deferred interest from a 0% APR offer?
Look for the word "if". The CFPB points out that deferred-interest offers say something like "no interest if paid in full within 12 months", while true zero-interest offers say "0% intro APR on purchases for 12 months". With a true 0% offer, interest starts only on what is left when the promotion ends.
Is the minimum payment enough to avoid deferred interest?
Usually not. The CFPB says the minimum payment is usually not enough to pay off the promotional balance before the period ends. Divide the purchase by the number of promotional months and pay at least that amount every month, or a little more to allow for rounding.
Which balance do my extra payments go to?
Under Regulation Z, payments above the minimum generally go to the balance with the highest APR first. In the last two billing cycles before a deferred-interest period ends, the excess must go first to the deferred-interest balance. The issuer may also, at its option, follow your request to apply extra payments to that balance, which the CFPB suggests asking for.
What happens if I pay one payment late?
Read the terms. Regulation Z lets an advertisement state, where it applies, that interest will be charged from the purchase date if the account is in default before the promotion ends. On cards with that term, a default can end the deferral early even if you were on track to pay in full.
Sources
- Regulation Z, 12 CFR 1026.16(h): advertising of deferred interest offers (definition of deferred interest and the deferred interest period; "if paid in full" must accompany "no interest"; statement that interest will be charged from the date the consumer becomes obligated if not paid in full, and if applicable on default)
- Regulation Z, 12 CFR 1026.53: allocation of payments (excess over the minimum to the highest APR first; in the two billing cycles before a deferred interest period expires, first to the deferred interest balance; the issuer may at its option follow the consumer's request)
- CFPB blog, June 2017: How to understand special promotional financing offers on credit cards (the "if" wording; 0% offers charge interest only on what remains after the promotion; deferred interest goes back to the purchase date; the $400 example; minimum payments usually too low; asking the issuer to direct extra payments)
- CFPB blog: Six tips to consider when you're offered a retail store credit card (deferred-interest offers on store cards; interest back to the purchase date; store cards may carry higher rates)
General information based on the sources above, not tax, legal or financial advice.