Are Those Holiday Gifts Hiding a Financial Disaster?
Special financing offers -- "Pay nothing until March 2015," "$0 down, 0% interest" and the like -- are a common pitch this time of year, showing up for purchases of everything from electronics and furniture to toys and clothes.
In fact, 70 percent of major retailers offer a financing option, with more jumping on the bandwagon every year, according to a study from CardHub.com. Kohl's (KSS), Dillard's (DDS) and True Value are among the brands that have expanded or added financing this year, the site reports.
Depending on the deal, consumers might make monthly installments over a set period or pay at their discretion (with a low monthly minimum) until the lump sum comes due.
But credit and debt experts say financing deals can be a ticking time bomb.
"We think these offers are on [Santa's] naughty list, no matter how stores present it to consumers," said Odysseas Papadimitriou, CEO of CardHub.com. By his estimate, financing can be 27.5 times as expensive as using a credit card.
John Ulzheimer, credit expert at CreditSesame.com, minced fewer words. "I can't stand those offers," he said. "I hate them."
Terms and conditions get ugly very fast if consumers miss a payment or fail to pay the balance in full within the promotional period. If that happens, you'll owe interest on more than just the remaining balance, Papadimitriou said.
Half of retailers' policies apply interest retroactively from the date of purchase to the entire balance, often at rates that top 20 percent. %VIRTUAL-article-sponsoredlinks%That's enough to counterbalance any holiday sales or discounts, and can add a month or two to the time it takes to pay off the debt.
"It's completely counterintuitive, and people don't expect that," Papadimitriou said.
And it's easier for consumers to be caught off balance than they might think.
"This time of year in particular gives people a sense of hopefulness that translates to spending," said Kit Yarrow, chair of the psychology department at Golden Gate University in San Francisco. But optimism that next year your financial situation will improve may not reflect reality, she said.
Financing also typically requires a minimum purchase that may be as much as several hundred dollars, said Gail Cunningham, a spokeswoman for the National Foundation for Credit Counseling. That encourages consumers to spend more -- a fancier computer or an impulse dining room set, for example, as well as the planned sofa. J.C. Penney (JCP) limits its financing offers to furniture and mattress purchases of $1,000 or more; at Apple (AAPL), minimums range from $499 to $1,599, depending on the term length.
"A lot of well-meaning people dig their own financial hole with that kind of thinking," she said.
Even consumers who won't have a problem paying off the debt in a timely way can sustain serious damage. That's because some stores finance your purchasing by opening a new store credit card with a line as large as your purchase.
"It's essentially going to be a maxed-out credit card," Ulzheimer said. "Worst-case scenario? Well over 100 points lost on your credit score." For someone planning to buy or refinance a home or purchase a car in 2014, even a slightly lower score could translate into a higher interest rate and thousands more in interest paid.
A credit card may be the cheaper financing option. Cards including Chase Freedom (JPM) and Capital One Platinum Prestige (COF) offer new cardholders 0 percent on purchases for up to 15 months, with any remaining balance subject to regular interest rates, Papadimitriou said.
Purchases are also covered by a range of credit card benefits and protections, including price matching and the right to dispute charges, Ulzheimer said.
But the best option yet is delayed gratification, as studies have found that purchases are more satisfying when people save for them.
Plus, Yarrow said, "saddled with debt is a bad way to start the New Year."
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