Credit card installment plans: what a no-interest plan really costs

The short answer

A card installment plan lets you split an eligible purchase into monthly payments. Some plans charge a monthly fee and others charge interest, so "no interest" doesn't necessarily mean the extra time is free. What matters is the total you'll pay, how the payment fits with the rest of your card bill, and what happens if you pay early or return the item.

In Julia's example, a $900 appliance costs $936 over 6 months with a $6 monthly fee, or $960 over 12 months with a $5 monthly fee. The question is whether the extra time is worth $36 or $60 to you.

The fee is the price

Take a 6 month plan with a $6 fee each month. You pay $150 toward the purchase each month plus the fee, for a monthly payment of $156. Over all 6 months the fees add $36 and the appliance costs $936.

That fee is 4% of the purchase price, but it isn't a 4% annual interest rate. The plan lasts 6 months and the balance falls as you pay, so a flat fee and an APR measure different things. Start with a simpler question: would spreading this purchase over 6 months be worth $36 to you?

• If you already have the cash, and paying in full leaves enough for your other bills, you'd be paying extra for convenience.
• If you don't have the cash, check whether $156 fits every month, with money left for your other purchases.

A 12 month plan with a $5 monthly fee lowers the payment: $75 toward the purchase plus the fee makes $80. But the fees total $60, which is $24 more than the 6 month plan. Weigh that extra cost against the breathing room, and put the payment beside everything else on your card bill, because the appliance won't be the only thing you need to pay for.

The plan payment is only part of your bill

Say you also need $400 for ordinary purchases to avoid purchase interest. With the $156 plan payment, you need $556 in total. The installment might feel manageable, but the rest of the bill hasn't disappeared.

The minimum payment may include your plan payment without covering enough of your other purchases to avoid interest. Issuers can show a separate amount covering the non-plan portion while leaving the installment arrangement in place. Chase calls it an Interest Saving Balance in relevant cases, and American Express uses an Adjusted Balance. What goes into that number depends on your account and its balance types, so follow your statement and agreement.

Read which kind of offer you have

Familiar product names can cover different ways of charging.

• Chase Pay Over Time can convert eligible purchases afterward for a fixed monthly fee. Its eligible financing at checkout can use a fixed APR instead, so the product name alone doesn't tell you whether you're accepting a fee or interest.
• American Express Plan It offers eligible cardholders plans with monthly fees. Eligibility, available durations and the offered fee depend on the purchase and the account.

Read the offer on your screen before accepting, because that's the one your bill will follow. Check eligibility before buying, too. Amex's Plan It calculator can illustrate possible payments, but it doesn't promise those plan options will be offered after the purchase, so you need a backup way to pay if the actual choices differ.

Don't buy a more expensive model because a calculator made the installment look comfortable. Settle on an affordable purchase first, then compare the real financing offer when it's available.

Paying early, returning the item and your credit limit

• Early payoff: Amex's published Plan It rules say paying a billed plan off early avoids future plan fees. But an extra payment may not go to the specific plan you want to pay off, so read which balance needs paying and how extra payments are applied.
• Returns: returning the appliance and ending its financing aren't always the same step. Ask how the merchant credit affects the plan, the remaining payments and future fees, and keep paying what's required until the issuer confirms the adjustment.
• Credit limit: a plan doesn't give you a fresh credit limit. The purchase still uses the account's credit, and its remaining balance can matter to your utilization.

Keep a list of every plan

List each active plan with its monthly payment, the months remaining and the fees still to come. Then add ordinary card spending and other bills. You need enough money for all of it, even if each individual plan looks affordable.

Before accepting, save the purchase amount, the payment schedule, the fee or APR and the total cost, plus the early-payoff rules. Also save the amount you need to pay to avoid interest on other purchases. If something is unclear, ask while you can still decline.

Before you act

Julia's Wallet Check puts the total plan cost beside the whole monthly bill. On the offer screen and the issuer's page, check whether it's a fee or an APR, the number of months, the monthly payment, the total cost, the early-payoff and return rules, and the payment that avoids interest on your other purchases. A smaller installment by itself doesn't earn a better verdict.

The fees and plan lengths here are Julia's examples, and issuers change eligibility, durations and fees, so terms may have moved since the lesson was recorded. For the appliance, the choice is $900 now, $936 over 6 months or $960 over 12. With $400 also owed on ordinary purchases, the $156 plan payment could mean needing $556 that month. More time might be useful, and you can choose to pay for it, but make that choice while shopping rather than discovering the extra cost on the statement.