Especially during the holidays, retailers offer no interest, no payment plans as a way for you to purchase that must have stereo system, dining room set, or recreational vehicle without having to put money down. For those who do not have enough cash on hand, this seems like an ideal way to get what they want now and pay for it down the road when their finances are in better shape.



What many people do not realize is that these plans are often times not the perfect solutions they initial seem to be. Depending on the terms of the contract and whether or not you are able to make your payments when they come due, these types of agreements may result in you having to pay significantly more than you anticipated and can wreck havoc on your credit rating.

To start with, even the most financially responsible consumer can see their credit score drop because they took advantage of a no interest, no payment sale. This is because in many cases you are opening a new line of credit with the retailer that, depending on if and how it is reported to the credit bureaus, may increase your credit utilization ratio.

Your credit utilization ratio is a sizable portion of the formulas used to calculate your credit score. It is the amount you owe divided by the amount of credit that has been extended to you. Experts suggest you keep your utilization ratio at or below 30. The line of credit for your deferred payment plan, however, has a utilization ratio of 100 because the amount of credit extended to you is the same as the amount you owe. Depending on your other credit accounts, this could drastically increase your overall utilization ratio and consequently lower your credit score.

Aside from impacting your credit utilization ratio, no interest, no payment plans can include unexpected stipulations in the fine print that catch consumers unprepared. For example, even though retailers may offer zero interest for the first year, it does not necessarily mean you are completely off the hook. Retailers sometimes begin calculating interest starting the day you signed the contract instead of at the end of the non-payment period. When receiving their first bill, consumers are met with the realization that they are responsible for the repayment of 12 additional months of interest fees in addition to the purchase price.

On top of this, consumers who are unable to make payments on time face the possibility of serious credit problems. Late payments can be reported to the credit bureaus and under the terms of your contract, may result in the interest rate on the amount you owe skyrocketing. In addition, even with plans where no interest was accumulated during the no-payment period, if you make even a single late payment, all of that interest may now be added to the amount you owe. What started out as a convenient way to make a purchase, may now involve high monthly payments, collections agencies, and a rapidly declining credit score.

If you are considering taking advantage of a no interest, no payment plan, make sure you understand all aspects of the agreement and read through the contract carefully. Know what interest rates you will be charged, whether or not you will be charged interest during the no-payment period, and what the penalties are for late payments. Only after having all the details will you be able to tell if a deferred payment plan is best for you.