Your credit rating can take a beating from 0% financing

Overextending by saying yes too much often has negative consequences

On the money

Your Money

February 15, 2004|By Lorene Yue | Lorene Yue,YOUR MONEY STAFF

Retailers are making it easy to get what you want without worrying about how to pay for it, thanks to zero-percent financing deals.

While it's tempting to finance a plasma-screen television or a new bedroom set with no interest or payments until next year, this deal, as with many too-good-to-be-true deals, has a catch.

Not only will you have to foot the bill eventually, but saying "yes" too often could erode your credit rating.

"Taking advantage of too many zero-percent financing deals can have some unpleasant and unexpected consequences," said Craig Watts, consumer affairs manager for Fair Isaac Corp., the company that invented the FICO score used to determine consumers' creditworthiness.

Zero-percent financing programs have been used selectively by retailers for years, but they came into their own when car and truck sales ground to a halt immediately after the Sept. 11, 2001, terrorist attacks.

Merchants of everything from appliances to eyeglasses have latched onto deferred billing, and consumers are lapping it up.

"I think the consumer has an immediate satisfaction and gratification" when something priced just out of reach is bought through deferred billing, said Dan Butler, vice president of retail operations for the National Retail Federation in Washington.

Consumer advocates have likened zero-percent financing programs to the classic bait-and-switch tactic.

They claim that buyers are lured into stores and auto dealerships with hopes of walking out with a deferred billing plan, only to find that they aren't eligible or that the item they want isn't in the program.

Zero-percent financing may seem like a great way to get a deal on something that is just a bit more expensive than you can comfortably afford.

Who wouldn't want to pay off a $1,200 purchase in equal monthly installments over a year with no interest charges?

But the deal is only good for the conscientious. Miss your deadline and you'll get slammed with interest accruing from the day you bought the item.

Even if you have only $100 left to pay on that $1,200 tab, if you're a day late, you'll find $220.80 tacked on to the bill if the APR is 18.4 percent.

It's a good idea to ask whether there is a penalty for paying off the bill early.

Some retailers, including Sears, won't start charging interest until the day after the zero-percent period expires, so some deals are better than others.

Keep in mind that taking a zero-percent offer means applying and opening a new line of credit.

Retailers will use their own credit program or partner with a bank to finance deferred billing.

That means that for every zero-percent financing deal you snap up, there is another entry on your credit report.

"In general, if there are too many open lines of credit on a consumer's file, it could cause their credit score to go down," said Susan Henson of Experian, one of three major credit-rating agencies. "Only open credit that you need and credit that you can pay off."

Once you open a certain number of accounts (how many varies from person to person) each additional line of credit you open after that can push your FICO score down.

"FICO scores look at your credit report and how you use credit," Watts said. "Most of the score's weight is given to how you pay back credit and then how much debt you have, but they do also look at unused credit."

Lorene Yue is a Your Money staff writer.

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