What does a credit card installment plan really cost?

Split a purchase into monthly payments on your card and the offer arrives with a reassuring phrase attached. No interest. That is literally true, and it is not the same as no cost.

What the plan replaces, and with what

Chase states the structure directly for Pay Over Time: "There's no interest for this purchase once it's placed in a plan, just a fixed monthly fee." ¹ Eligibility starts at purchases of $100 or more after the fact, or $50 or more at checkout. ¹

So the interest charge is removed and a fee is put in its place. The fee buys exactly what the interest would have bought, which is time.

The consequence is a disclosure gap. An APR has to be printed and compared; a fee is quoted as a dollar amount per month and compared against nothing. You are shown what it costs and not what it costs relative to anything else.

Converting the fee into a rate

Two steps, and the second is the one people skip.

First, annualise. A fee of 1.5% of the purchase per month is 18% of the purchase per year.

Second, correct for the balance you actually owe. The fee is calculated on the original purchase amount and stays there for the whole plan, while the balance you owe falls with every payment. Over an evenly repaid term your average outstanding balance is roughly half the original, so the rate you are really paying on the money you really have is roughly double the annualised fee. That correction is the same idea a revolving balance is charged on, where interest follows the average across the cycle rather than one day's figure: see how average daily balance interest works.

That 1.5% monthly fee is therefore closer to a 36% effective APR than to 18%. Against a published purchase APR in the twenties, the plan that advertises no interest can be the more expensive way to borrow.

The conversion is rough on purpose. It is a screening figure that tells you whether the plan is in the same range as your APR or well outside it, which is the decision in front of you.

Screening table

Example numbers for the math, using the same conversion walked through above: the monthly fee times 12, then roughly doubled for the falling balance. No issuer published any figure in the right-hand column; it is our own arithmetic, and the plan terms in front of you are the ones that count.

Read the middle column only as a first glance. The right-hand column is the figure to compare with your published purchase APR.

Where it interacts with the rest of the card

A plan balance is usually carved out of the revolving balance and repaid on its own schedule. Two effects follow.

• The plan payment is added to your minimum due, so the amount you must pay each month rises for the length of the term.
• Whether the rest of your account keeps its grace period depends on paying the statement balance in full, and the statement balance now includes that plan payment. ²

Neither is hidden, and neither is prominent. They surface as a larger minimum and a longer commitment than the purchase implied.

The comparison to run first

Before starting a plan, get three numbers together.

1. The total fee across the whole plan, in money.
2. The purchase APR on the same card.
3. The effective APR of the plan, from the conversion above.

If the effective APR is below the purchase APR, the plan is the cheaper way to carry that purchase. If it is above, carrying the balance normally costs less, and the plan is buying certainty about the payment rather than a lower price. CardLab's installment lab runs this comparison against the card's own terms, and it labels the effective APR as its own arithmetic rather than a figure the issuer published, because the issuer published a fee.