As shopping traps go, long-term payment deals are as bad as they get. They can cost you hundreds of dollars in fees alone, even if you pay everything off within the interest-free period.
CHOICE researched and shadow shopped some interest-free payment offers available with major retailers, and found:
- fees can range up to 87.6% of the minimum purchase price
- a $549.95 Braun shaver could cost you close to $700 with a David Jones three-year, interest-free offer on its StoreCard, and almost $1000 on the Amex David Jones card
- although most shoppers paid off their purchase within the interest-free period, almost one in three paid interest.
Misled at point of sale?
A CHOICE shadow shop of major retailers offering interest-free deals revealed a lack of proper disclosure. Salespeople in five of the six stores gave incomplete or wrong information about details such as interest rates, fees, and conditions.
Retailers are exempt from some important licensing requirements imposed on the credit providers whose products they represent. CHOICE thinks this loophole can cause consumers to be misinformed about the credit deals they're signing up for.
How store credit schemes work
Long-term payment offers usually come in the following formats:
Buy now, pay later
You take your purchase home and don't need to make any repayments or pay interest during the interest-free period. However, if you fail to repay it (along with all the fees) within the interest-free period, interest will usually apply on the remaining balance from the end of that period onwards.
Interest free, instalments payable
You pay off the purchase in equal instalments over the interest-free period. If you miss an instalment, interest will apply not only to that instalment but also to the remaining balance of your account.
Interest free, with minimum payment required
You pay a minimum repayment over the interest-free period and must pay the remaining amount before the interest-free period expires. If you miss minimum repayments, penalty fees will apply.
No deposit, four years to pay
You pay off the purchase over four years, interest applies from day one and there is no interest-free period.
No interest ever
No interest ever is a more recent payment deal available through Certegy Ezi-Pay. It allows fortnightly payments for a period between 12 to 36 months, usually with a 10% deposit. This payment offer eliminates one major trap of "interest-free" offers – an astronomical interest rate after the offer ends but scores worse than interest-free offers on the second trap: high fees.
Conditions often apply to these offers, such as upfront deposits and minimum purchase amounts.
What interest free costs you
The fine print on interest free
- You usually have to apply for a credit or store card to obtain interest-free offers.
- You may have to pay an application fee, annual or monthly fee and high rate of interest.
- The credit card companies aren't obliged to remind you when the interest-free period ends, so it's important to check your statement carefully, especially if you use an interest-free offer that has a minimum payment.
The minimum payment normally won't cover the purchase price within the interest-free period, so you'll need to make extra repayments or pay a lump sum at the end to avoid the interest slug.
The smaller your purchase, the greater the impact fees have on the value of the offer:
- With the GEM Visa Card you pay a flat annual fee of $99, and an automatic six-month interest-free period applies with any purchase over $250. But you can use it for as many interest-free purchases as you like without paying any additional fees. Depending on the offers available at different retailers, you can use it for more expensive purchases and longer interest-free periods as well. You could, for example, use it for a five-year interest-free offer at a furniture retailer to buy a $3000 lounge suite and make use of six months interest-free on a $260 anniversary dinner in a two-hat restaurant.
- With other cards, such as the David Jones StoreCard, you have to pay a new application fee and additional monthly fee with every interest-free offer.
Interest-free vs credit card
- For small purchase amounts of $1000 or less and short payment periods up to two years, a credit card normally works out better. Obviously the lower the interest rate the less you pay.
- For large purchases such as $3000 over longer periods such as three years and more, interest-free can work out better than a credit card.
- Interest-free and no-interest-ever both have high fees, but no-interest-ever may be less risky as there's no astronomical interest rate if you don't pay it off in full during the period.
|$1000 OVER THREE YEARS
|Interest rate (%)
|Total fees/interest ($)*
|High-rate credit card
|Medium-rate credit card
Using the table: We used the fees for a Certigy Ezy-Pay no interest ever purchase, and the fees for the Go Mastercard for interest-free deal.
*Rounded to the nearest dollar
Updated 18 November 2013.
Here are just a few other shopping traps we suggest you watch out for.
The salesperson tells you that, for an extra couple of hundred dollars, an extended warranty on your purchase will give you another four years' protection should anything go wrong. But you're buying insurance you most likely won't need: most appliances are covered by a manufacturer's warranty, usually one year for TVs and up to three years for some LCD and plasma models. And, if something goes wrong outside the warranty period, you may be covered under the Australian Consumer Law, which provides statutory consumer guarantees for any kind of goods or services regardless of any manufacturer or extended warranty.
Christmas Club savings accounts
Usually offered by credit unions, they're designed to help you avoid credit card bill shock after Christmas by preventing you from accessing any funds you've saved until just before Christmas. But some have dismal interest rates, such as just one per cent. You'll be better off with an online savings account that adds a much higher rate of interest to your savings.
Gift cards and vouchers
Gift cards and vouchers for stores have been the subject of numerous complaints to CHOICE over the years. Almost all gift cards sold in Australia expire after one year or less; only a handful of cards, such as Bunnings, IKEA (Perth and Adelaide stores), EB Games and Toys R Us, have an indefinite expiry.
Online shopping scams
Scammers can pretend to be selling a product via a website or auction site – often very cheaply – just so they can steal your credit card or bank account details. Similarly, they may take your money but send you a faulty or worthless product instead – or even nothing at all.
No refunds given
Retailers sometimes display signs saying "no refunds given". This is illegal. If what you've bought is faulty or defective, you're legally entitled to a refund. However, you're not legally entitled to a refund if you simply change your mind.