Why Special Financing is Not How to Fix Your Credit

In the current economy, retailers realize that they are competing heavily for every dollar spent by consumers affected by the credit crisis. Because of this, many are offering promotional 6-month, 12-month, or even 24-month financing with no interest.

On the surface, it seems like a great deal if you can get approved – get your holiday shopping done now, and pay it off over the course of the next year. However, the deeper and you’ll find that the terms and conditions are riddled with pitfalls designed to make sure you end up paying more (possibly even more than you can afford). Make no mistake about it, the Black Friday shopping event is designed to put retailers “in the black” for the year, not to save you money.

There are many reasons these holiday promotions just don’t add up, but there are three main “gotchas” that will keep you from fixing your credit if you fall into the trap:

Gotcha Number 1: Those special promotional rates are (generally) only available for high-priced purchases.

That means you’ll have to spend more, and in so doing, your debt-to-credit ratio will rise. Having high balances on any credit account actually lowers your credit scores. Once you factor in the cost of the interest rate if you don’t pay it off in full by the time the promotional period ends, you could lose any savings from the discount price.

Gotcha Number 2: If you miss a payment (even if it’s only by a day, or a few hours!), a penalty interest rate is generally applied, sometimes retroactively, to your balance.

If you’re a month late, you’ll get dinged on your credit score twice! Once for the late payment, and again as the interest retroactively applied to your balance will increase your debt-to-credit ratio. With a 30% or more penalty interest rate, you can actually wind up paying more for your items than if you’d bought them at full price.

Gotcha Number 3: If you don’t pay off the entire loan by the end of the promotional period, you’ll have to pay the interest on the entire purchase, not just the last few months you have left. Again, this negates any savings you may have thought you had.

Even if you manage to pay on time and avoid the interest penalty, those great introductory offers can quickly spiral out of control once the promotional period ends, and the lower your credit score, the more you’ll potentially pay in retroactive interest:

1. Pay your bills on time. Sounds simple, but this is the best way to keep your scores high. Delinquent payments and collections have a severe impact on a score.

2. Keep credit card balances low. Large balances will have a negative impact on your score. I generally recommend keeping balances below 30% of your credit limit.

3. Don’t open too many new accounts too quickly. Especially if you’re relatively new to credit. This will create too many inquiries which hurts your score.

4. Make sure the information in your credit report is correct. If it’s not, dispute it with the credit agencies and/or with the creditor directly.

5. It’s OK to check your own credit. Be sure to monitor your credit on a regular basis and be ready to dispute any derogatory information on your reports!