Store credit cards may try to lure you in with steep discounts and tempting sign-up offers, but you should think twice before signing up for one.
That's because many retail offer credit cards or special financing plans come with so-called "deferred interest."
Stores typically offer deferred interest periods ranging from six months to two years. As long as you make regular payments during that period, the store won't charge you interest. But if you miss a payment or don't pay off your balance on time, you'll be charged for all of the interest that has accrued since you made the purchase.
That interest can add up. In fact, you may end up paying nearly 28 times more in interest charges by using a store credit card with deferred interest than you would using a regular credit card with a 0% annual percentage rate, according to data from WalletHub.
"Deferred interest should be a last resort," Odysseas Papadimitriou, CEO and founder of WalletHub, tells CNBC Make It.
Although signing up for a store credit card with deferred interest isn't "the worst idea in the world" if you're able to adhere to the payment schedule, you don't want to make it your first financing option if you can help it, he says.
Deferred interest financing can come with costly penalties
Around 60% of people don't understand how deferred interest works, WalletHub reports. That can potentially lead to expensive surprises down the road.
If you get a regular credit card with a 0% APR period and fail to pay it off by the end of the term, you'll just owe interest on your remaining balance. However, if you don't clear your balance on a deferred interest credit card, you'll have to cover all of the interest charges that accumulated during the promotional period.
And those interest charges could be steep. Many of the regular rates for the store credit cards WalletHub analyzed were over 30%.
Say you buy a new kitchen appliance for $5,000 with the store's 12-month, 0% deferred interest financing plan. Although you won't be charged interest during the promotional period, it will still accumulate.
If you miss your last payment and the card's regular interest rate is 29%, you could be on the hook for around $800 in retroactive interest, even though you were close to paying off your entire purchase, says Ted Rossman, Bankrate's senior industry analyst.
"I suspect most people don't realize they can be charged retroactively for all of the interest that would have accumulated back to the start of the promotion if they fail to pay the entire amount before the deferred interest offer expires — even if they just have $1 left," he tells CNBC Make It.
Deferred interest v. balance transfer credit cards
You may have heard of 0% APR balance transfer credit cards, but they're not the same as retail credit cards with deferred interest.
Although both a balance transfer credit card and a retail credit card with deferred interest won't charge you interest during the introductory period, that's where the similarities end.
With a balance transfer card, if you don't pay off your balance before the introductory period, you'll only be charged interest on the remaining balance. If you miss a payment, you may face a late fee or other penalties.
However, if you're still carrying a balance on a retail card and you miss a payment, you'll owe all of the interest that has accumulated.
Additionally, balance transfer cards can actually help you pay down debt instead of racking it up.
Say you have a high balance on a credit card with a 21.19% interest rate, the average rate for existing accounts, according to WalletHub. If you move that debt to a balance transfer card, the 0% APR introductory period puts a pause on the interest charges, giving you a chance to chip away at your principal balance.
When it comes to deferred interest, proceed with caution
Although many store credit cards and special financing plans use deferred interest, not all of them do. One way to figure out whether you're signing up for such a plan is to look for a key word: if.
Store offers that say something like, "No interest if paid in full within 12 months" indicate that the financing plan uses deferred interest, according to the Consumer Financial Protection Bureau. On the other hand, credit cards without deferred interest would say something like, "0% intro APR on purchases for 12 months."
And remember, while a deferred interest financing plan could save you money if used wisely, you need to be "absolutely certain" you can pay off the full balance during the introductory period, Matt Schulz, LendingTree chief credit analyst, tells CNBC Make It.
"If you aren't 100% certain you can pay the purchase off during the introductory period, look elsewhere," he says. "Yes, these deals can save you real money, but it only takes a small mistake or two for you to instead be facing a big retroactive interest bill."
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