Top Credit Cards for Holiday Shopping

NEW YORK (MainStreet) — With the kickoff of holiday shopping, you may be contemplating some sweet-sounding credit card offers. But be careful: The 0% financing deals so plentiful this time of year often come with a hidden trap known as "deferred interest" that can jack the rate sky-high if you're not careful.

Before racking up charges, shoppers need to think carefully about just what card features will serve them best, says Card Hub, the card-information site. The zero-percent deal may not be the best.

"Often advertised with bold tag lines stating 'Zero percent Interest for 12 months' or 'Special Financing,' these plans sound great but the fine print reveals how financially disastrous they can be, since the regular rate applies retroactively to the entire original balance if you do not pay in full by the end of the promotional period, or you make a late payment, no matter how much of the balance you have already paid back," Card Hub says.

There's a fine distinction that is easily missed. In the best deals, your card may offer zero percent on new purchases for six months, then start charging interest. In that case, if you took seven months to pay off $800 in charges, you'd be charged just $2 in interest for that seventh month, assuming a 20% annual rate, Card Hub says.

But a deferred-interest card would penalize you for not paying off the entire balance by the six-month deadline. You'd pay all the interest that would have accumulated during those six months had there been no zero percent deal in the first place. Interest charges after seven months would therefore be $55, assuming the same 20% annual rate, Card Hub says. Even if you'd paid down much of the debt before the six months ended, you'd be charged as if the balance were still the entire $800.

How do you know if such onerous rules apply? They're in the fine print of your card contract, but in some cases the language is so murky it's almost impossible to decipher. Card Hub looked at deals from 50 big retailers, scoring them on whether they offered deferred interest and, if so, how clear their websites were about the terms.

"The best deals come from retailers that do not use deferred interest, which include: Target, Nordstrom and Gap," Card Hub said. "The worst deals come from retailers that not only offer deferred interest, but also are not transparent about their policies — a list that includes the likes of Pottery Barn, Amazon.com, Lowe's and Macy's."

Obviously, the best way to protect yourself is to use a zero percent deal that really does waive interest during the grace period. But if you already have a card and are being offered zero percent, scrutinize the contract for details on how much interest will be charged if you don't pay off the balance before the grace period ends.

Then, of course, be religious about paying off that debt. The zero percent deal should not be an excuse to spend more than you can afford. In fact, if you make a habit of paying your card debt in full every month, you're already free of interest payments, so there's no reason to favor a 0% card over one that charges 15% or 20%.

--Written by Jeff Brown for MainStreet

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