The other week we found out that opening a store card to save 20% on your first purchase isn’t always a good deal. But have you ever had one of those tricky sales people try to entice you with glorious interest free financing?
“Open an account today and pay no interest for 12 months when you spend $500 or more!”
Interest free money, sounds good right? Let’s break it down.
So you walk into your favorite electronics store looking for a new TV. You find the perfect TV for $350, but then the sales guy starts telling you if you spend $500 or more you can get interest free financing for a year when you open up an account. Suddenly, you’re looking at TVs that cost $500 or more to take advantage of the interest free financing. Is it worth it?
Let’s take a look at a few scenarios using a possible store card APR of 28%.*
*Numbers are rounded for clarity.
Scenario 1 – Buy What You Want, No Store Card
Find $350 TV --> Buy TV --> Total Cost with Tax: $372
Scenario 2 – Get Store Card, Spend More to Get Offer and Don’t Pay Off During Promotion
Assuming you didn’t pay off your balance during the promotion period of 12 months, but did pay the balance off within 15 months.
Find $350 TV --> Salesperson offers interest free financing --> Find $500 TV to get financing offer --> Don’t pay off balance in 12 months --> Total cost with interest and tax $635
Scenario 3 – Get Store Card, Spend More to Get Offer and Pay Off
Find $350 TV --> Salesperson offers interest free financing --> Find $500 TV to get financing offer, buy it --> Pay off balance within 12 months --> Total cost with tax: $532
Taking a look at these three scenarios, you can see that you’re spending more that you initially intended when you go for the interest free financing. If you have to have the interest free financing, you should meet the requirements without spending more than you originally intended, and should make sure that you pay off the entire amount within the financing promotion. Usually interest still accrues on your balance during your promotion time. You don’t want to see yourself getting charged with an entire year or more of an almost 30% APR!