May 9, 2012

Zero Percent Credit Cards – Too Good To Be True?

In today’s modern economy, many consumers are finding their attention drawn to the attractive prospect of zero interest credit card offers. Traditionally, credit card debt has proven to be one of the more costly types of finance for the average household, with interest rates ranging from introductory low rates to standard rates into the 30 percent plus range. More and more consumers find themselves looking for ways to ease their credit card debt commitments, and zero APR credit cards can often seem like the ideal solution. However, there are many things to consider before you enter into any financial arrangement, and these offers are no different.

What are Zero Percent Credit Cards?

Most credit cards advertise their costs in terms of APR, or annual percentage rate. Unlike the name suggests, APR is not a direct reflection of annual costs, but it is a good indicator of how costly different credit cards can be. 0% interest credit cards, are credit cards that offer a special interest rate for consumers who transfer a balance on their existing credit card over to a new card from a new provider. Many providers also offer 0% rates on purchases on these new cards. The interest free introductory period on these credit cards varies, but is usually between 6 months and 24 months. For example, the Discover More card offers 0% APR on both balance transfers and purchases for 15 months from the date you open the account.

Benefits of 0% interest Credit Cards

The clue is in the name. An interest free card allows you to access a line of credit that doesn’t cost you anything. Let’s take the Discover More credit card mentioned above as an example. If you wanted to buy new bedroom furniture for your house, and you had recently been issued with a Discover More 0% credit card, you know that you have an interest free period of 15 months on any purchases you make on your card. If you spend $2500 on furniture, you know that you can make repayments to your card of $167 per month for 15 months. By the time your introductory period is finished, you will have paid for your furniture without paying any interest at all.

Similarly, if you are with a different credit card provider and currently have an existing balance, you can transfer that balance to a no interest credit card and make structured repayments for the introductory period. This allows you to repay your debt much more quickly, as with typical standard APR rates of roughly 20%, credit card repayments often seem like fighting an uphill battle.

Downsides of no interest  Credit Cards

Unfortunately, there are downsides to interest free credit cards, and many consumers do not take the time to properly research the terms and conditions of these offers. Far from saving money; this can lead to consumers paying even more in interest and charges than they might have been paying with a previous credit card provider.

There are several common downsides to zero interest credit cards.

First of all, nearly all balance transfers to a zero interest credit card are subject to a transfer fee – usually 3%. While this does not seem excessive, it still much be considered. Someone transferring a balance of $5000 will be subject to a once of cost of $150 for the transfer. These costs must be factored in.

Secondly, these no interest credit cards often only remain interest free as long as you don’t miss a single payment. With most of these offers, a single missed or late payment will result in the interest on both purchases and balance transfers revert to the standard typical APR. If we look back at our Discover More card, we can see exactly how this will work. In the terms and conditions, Discover states that not only will a late payment cause the introductory period to end permanently, but that a special “Penalty APR” will apply indefinitely. This penalty APR is higher again than the standard APR. Furthermore, if you miss another payment, Discover reserves the right to add up to another 5% on top of your applicable APR, and can do so for each subsequent late payment. Quite quickly, you can see how no interest credit card can turn into an extremely high interest credit card.

Why Do Banks Offer Zero Percent Credit Cards?

These credit cards still make money for credit card providers. Every time you use your credit card in a store or online, the retailer must pay a charge to the credit card provider. Even when you’re not paying interest, your credit card provider is making money on your card usage – that’s how credit cards work. As well as this, many consumers who have these credit cards are more likely to use their card more frequently, thus increasing the service fees paid by retailers. Ultimately, zero interest credit card providers offer these special rates because they want your business, and are confident of making their money back in the long term. Many people lack the willpower to resist the lure of APR free purchases, and often reach the end of their introductory period with a higher balance than when they originally opened the account.

Should I Apply for such an offer?

Not without doing your homework first. Any credit card offer comes with terms and conditions, and taking a couple of days to fully research the different options available to you can save you both time and money in the long run. Additionally, you should consider your credit score before submitting application; your score often can influence how high your APR will be.

Most importantly, what you need to consider is whether a zero percent credit card is right for you. Many people avail and use such credit card offers to dramatically reduce their cost of credit. Just as many fall foul of the terms and conditions attached to these interest free offers. You need to ask yourself whether you have both the willpower, and the affordability, to manage a zero percent credit card offer. If you do, then you could end up saving yourself a lot of money.

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