Zero percent offer on a store card? Watch out.

Store credit cards typically offer deferred interest, which means a hefty interest charge if you don't pay on time.

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    Signs for American Express, Master Card and Visa credit cards are shown on a New York store's door in 2007. Unlike these major credit cards, issued by banks, store credit cards typically offer zero percent deferred interest, which can cost consumers a bundle if they don't understand the terms.
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Stroll into any furniture store or tire shop and there’s a good chance the sales associate will try and peddle you their in-house financing card. Often times, it will be described as being “zero percent for six months” – sometimes, much longer.

If you’re in a financial rut, getting zero percent for six months on that new set of tires you desperately need sounds like a no-brainer. Pay no interest for a couple of years on that new living room set? You might jump at the chance.

But don’t – until you understand what you’re signing up for. It’s probably not a zero-percent credit card offer from a major bank, like JP Morgan Chase or Capital One, where you really do get zero percent on purchases, balance transfers, or both for 12 or 18 months. Typically, store credit cards offer something entirely different: zero percent deferred interest.

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What that means is that the interest charges are deferred during the promotional period. The “no interest if paid in full” part means that if you pay off the entire purchase within the zero percent window, you won’t get charged interest. If you don’t pay it off, then you get charged the interest retroactively, going back all the way to the first day of the purchase. Even if you only have a dollar left to pay, the retailer can charge retroactive interest on the full original purchase price.

To add insult to injury, store cards are notorious for having interest rates in the neighborhood of 25 to 30 percent. That’s significantly higher than the national average annual percentage rate for credit cards, which is currently around 15 percent.

Is it false advertising?

The biggest problem with deferred interest offers is that many customers don’t understand them. It’s true that retailers disclose the terms and conditions in the fine print, but many people don’t read through those. Even if they do, the legalese can be difficult to comprehend.

It’s not uncommon for sales associates to misunderstand the offers themselves. They may incorrectly describe them as being zero percent for a period of time, while failing to mention the catch of deferred interest.

No wonder so many customers are shocked when those retroactive interest charges show up on their bill.

Better alternative: plan ahead

Despite their drawbacks, store financing cards can still be useful in a couple scenarios.

For those with subprime credit scores, financing through the store may be the only option available.

For those with excellent credit, store financing may be the way to go if the no interest window is extremely long. It’s not uncommon for furniture stores to offer up to a 60-month time frame on big ticket items.

Of course in both scenarios, it’s only a deal if you are 100 percent confident in your ability to pay off the balance before the time is up. In today’s economy, that can be risky. A job loss, medical emergency, or other unexpected disaster could derail your plans.

If you need to finance, the safest solution is to do so with a major credit card. If you plan ahead, you can sign up for one that comes with a zero percent introductory offer. The offer may be shorter – typically no more than 12 to 18 months – but the real advantage is that it won’t ever charge retroactive interest. Plus if you end up needing longer to pay it down, you can always transfer your balance when the zero percent offer runs out.

– Michael Dolen writes credit card reviews for CreditCardForum, a website he created to help consumers with their credit decisions.

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