‘Delayed payment’ trap can catch unwary buyers

Recently divorced Washington County consumer Jean Thomas (not her real name) was trying to make a new life for herself and her children. Short on cash and furniture, she responded to a furniture store’s offer of “no payments for six months” and “low finance charges” with a purchase of $3,352 in bedroom and kitchen furniture. Jean knew she couldn’t make monthly payments right now, but with a new job, she was pretty sure she would be in better shape in six months. She made a $200 down payment, and relaxed. Boy, was she in for an unhappy surprise!

Seeing the “$0 due” on her monthly statements from the credit company, Jean just put the bills aside. After six months, she received a statement requesting her first $87 monthly payment. But the balance due had shot from $3,152 to $3,445. How could this be?

Upon closer examination, Jean realized that “deferred finance charges” of $271 and a “periodic finance charge” of $22 had been added to her bill. Not only that, but the annual percentage rate was now 21.93 percent, not the “low” 9 percent she had been promised. She had fallen into a credit promotion trap.

Many companies make “delayed payment” offers to attract customers. Surely you have seen the advertisements. “No payments or finance charges due until 2004!” they promise, in an attempt to bait cash-poor customers. One key word in these ads is “until,” often meaning that finance charges will accumulate during the “no payment” period. However, unless a consumer pays off the entire balance by the end of the promotional period, he or she will be billed for all the interest that has built up on the balance.

In Jean’s case, $271 of extra cost. In addition, her “low annual percentage rate” of 9 percent had also disappeared. In reading the fine print, she realized that this was an “introductory” rate. After the six months had passed, the rate had shot up to 21.93 percent. The games people play.

It’s probably too late for Jean, but it may not be too late for you to avoid this trap. If you respond to a “no payment,” “low interest,” or “no-interest” offer, ask probing questions before signing on the dotted line. Make sure you understand the agreement and terms.

Whether you are buying a couch or a car, if the salesperson says no payments are due for a set period (let’s say 12 months), ask what happens after the period is up. Will you be billed for “deferred finance charges” for the entire balance? At what rate is the Annual Percentage Rate set during the 12-month period? What will the APR be after the 12 months are up? But don’t count on his or her word because often salespeople don’t even understand the complexities of credit themselves. They just want to make the sale and get their commission.

Read the credit application closely. Look for key words such as “deferred,” which is not the same as “no” or “never.” “Deferred” means that sooner or later, you pay. Also, look for the word “introductory.” That means that sooner or later the terms will change and the rate will go up.

What could Jean have done to avoid this situation other than reading the paperwork more closely? One option would have been to go to her local bank or credit union, describe what she wanted to buy and why, and ask to be considered for a secured line of credit, personal loan, or other arrangement to avoid accumulated finance charges or a high APR.

We suggest you do the same before you fall into a credit trap.

Consumer Forum is a collaboration of the Bangor Daily News and Northeast COMBAT/The Maine Center for the Public Interest, Maine’s membership-funded nonprofit consumer organization. For help or to request individual or business membership information write: Consumer Forum, Bangor Daily News, PO Box 1329, Bangor 04402-1329.