Expert: credit can be costly

Watch the fine print when taking zero-percent financing.
CHICAGO TRIBUNE
CHICAGO -- With 1.5 billion in estimated wealth, Oprah Winfrey hardly has to worry about how she's going to pay for life's material things.
But even the media queen can't help but notice zero-percent financing offers for various big-ticket items.
"I see these ads all the time for, 'Buy now, zero-percent financing.' What does that mean?" Winfrey asked a financial expert on one of her shows earlier this year. "I think, 'It's too good to be true."'
As Christmas closes in, retailers including Carson Pirie Scott, Sears, Comp USA and Toys "R" Us are advertising various no-interest financing plans to catch the eye of shoppers and generate traffic.
Consumers also can hop into a Chevrolet that they've bought with zero-percent financing for 72 months, head to a Lasik eye center where they can pay zero down and no interest until 2008, and exercise on a treadmill purchased with interest-free financing.
Consumer advocates say such offers -- which generally enable consumers to escape interest payments if they pay the bill by a specified time -- can be a great deal for people on top of their finances.
"It's like a second helping of pumpkin pie," said Greg McBride, Bankrate.com senior financial analyst. "If you're a workout warrior, you're pretty safe."
But for consumers less disciplined about their spending or less diligent about checking under the hood for the fine print, such offers can be ticking financial time bombs.
How they work
According to TrueCredit.com, most of the retail industry's no-interest/no-payment plans work like this: If, say, an appliance retailer offers no payments or interest for 12 months on Dec. 1, the shopper has through Nov. 30 (the date as published has been corrected in this text) of next year to enjoy the product without paying any interest on top of the purchase price.
But, if the item isn't paid off by the maturity date, the consumer could owe not only the unpaid balance, but also interest backdated from the 12 months.
"You buy 5,000 worth of furniture, and you've paid all but 200 back and the promotional period ends, and, bam, you're hit with hundreds of dollars of interest," said Curtis Arnold, founder of Cardratings.com, a credit education Web site.
Heading into the holidays, many consumers vowed to resist zero-percent financing and no-payment/no-interest pitches, according to a study last month by TrueCredit.com, a unit of credit information provider Trans-Union LLC.
Asked how likely they are to make a big purchase this holiday using zero-percent financing or a no-payment/no-interest offer, fewer than 2 in 10, or 18 percent, say it's very or somewhat likely.
"People are feeling a little conservative about zero-percent financing offers," Lucy Duni, TrueCredit.com consumer education director, said last week.
But maybe not conservative enough -- only 71 percent responded that if they were to take advantage of such an offer, they'd pay off the total due before incurring an interest charge, TrueCredit.com also found.
Retroactive interest isn't the only potential pitfall they'd face.
Other penalties
The no-interest/no-payment plans often require opening a store account. But applying for too many accounts can hurt credit scores, triggering a chain reaction making it tougher to get favorable terms later for, say, a mortgage.
Also, the merchant often opens the account with a credit limit at the product's purchase amount, "so right there you have a new credit account already at its limit," Duni said. "You want to try to keep credit at below 35 percent of the limit."
If consumers don't pay off the program in time and have to pay retroactive interest, they'll likely face higher payments than they would with a bank credit card.
"Store credit cards are typically charging higher interest rates than the average Visa or MasterCard," said Howard Dvorkin, author of "Credit Hell: How to Dig Out of Debt"
Shaun Davis, a Hollywood, Fla., businessman, learned firsthand about the dark side of such offers after signing up for a 12-month no-interest program to buy a TV. He was tripped up when the due date on the statement differed from the original maturity date on the zero-percent deal.
"Unless you pay strict attention to all the dates, the payment can go in on time for the billing period, but it may be late for the zero-percent financing" due date, Davis explained. "It was deceiving."
The finance company slapped him with about 1,500 in retroactive interest. "We fought it and got it reduced a little," he noted.
"Most people with credit will know when the payment is due for the billing date," Davis said. "When you have this other layer, if you just pay attention to what you normally pay attention to, it throws you off."
Still, some consumers might find zero-percent financing and no-payment/no-interest plans a hard habit to break.
What auto industry did
That's because the auto industry has conditioned a growing number of motorists -- including those whose credit isn't in tip-top shape -- to expect such offers.
In a survey last September, 37 percent of car buyers said zero-percent financing was the most appealing incentive, according to the 2006 Kelley Blue Book New-Vehicle Buyer Attitude Study on Vehicle Purchasing and Pricing. That's up 11 points from last year.
Car buyers became more receptive to zero-percent financing offers as interest rates rose over the year, and automakers under pressure to sell cars were willing to oblige them, Kelley executive editorial director Jack Nerad said in a recent interview.
The way zero-percent financing generally works in the auto industry is: The consumer begins monthly payments upon buying the car but doesn't pay anything beyond the principal, as the interest payments are being subsidized by the manufacturer or its finance company.