Are 0% Apr Credit Cards a Magic Debt Solution?

[vishenda]

0% APR credit cards are becoming extremely common in the world today, thanks to a growing problem with credit card debt and a growing awareness on the part of banks and credit card companies that people want to find a way out of their financial trouble. And 0 interest credit cards at first seem like an ideal way out. Imagine, no additional finance charges accumulating while paying down your existing balances... It's almost too good to be true! And it is almost like magic--in the sense that magic is often an illusion.

This isn't to imply that the credit card companies are being deceptive when offering 0% APR credit cards, because they aren't. Their exact pricing policies are right there on the application pages to any 0% APR credit card, though many people just see the big zero and coast on through the application. But before making any financial agreement, especially an agreement to enter into what amounts to a borrower/lender agreement with a bank or corporation, it pays to stop and take a closer look at exactly what you're agreeing to.

First of all, there's the well-established fact that 0% APR is always an introductory rate, lasting anywhere from six to twelve months. Since the major way a credit card company makes money is through interest rates, it wouldn't make much sense for the company to do anything else. At some point, they will have to charge you interest, even on a 0% APR credit card, which is no problem, as long as you know how much interest you're getting, right?

But it's still important to look deeper. Many credit card companies charge extremely high interest rates--18% and up--on even 0 interest credit cards, once the introductory period has expired. Often, there are variable interest rates to justify this: a fairly low rate (maybe 11% to 14%) for cardholders with the best credit rating, a medium rate (17% to 19%) for cardholders with still okay credit, and a standard rate (as high, in many cases, as 23%) for cardholders with average credit. Still higher is the default rate, which you enter if the credit card company decides, for whatever reason, that you've been making too many late payments or that you've become a bad credit risk. At this point, your interest rate shoots up to as many as twenty-four percentage points above the prime rate (8% as of June, 2006), leading to a default rate of a massive 32%.

So imagine this scenario. You've gotten into some difficulty with credit balances and you're looking for a way to stabilize your finances before paying everything off. Say you've got $1,000 in your existing balances across several cards. You apply for a 0% APR card with a balance transfer option and consolidate all of your debt on the existing card (assuming there's no fee for balance transfers.) So now you have a 0 interest credit card with twelve months to pay it off. For whatever reason, your expected financial windfalls don't come through, or required purchases offset your balance payments and your balance remains constant at $1,000 after a year. Because you've got average credit, your APR starts at 22%, adding $220 to your balances the first month, and more thereafter. You miss some payments, bringing your APR up to almost 33%. At this point, a full third of your balances are being added on to your debts every month, and you may start looking around for still more 0% APR credit cards for salvation

With some sound financial prudence and a determination to pay off your balances within the introductory period, 0% APR credit cards can be valuable resource for getting out of debt. But make sure, when you're trying to get out of debt, that you know what agreement you're getting into first.

Acknowledgement:
Robert Alan

[bjl584]

Good write up. I have to agree. 0% credit cards can be a useful tool if used in a responsible way. However, more often than not people use them as a quick fix to get out of some financial trouble that they have found themselves in. The problem is, this solution does not address the root problem. The root problem is that these people are in debt not because of high interest rates or anything else. They are in debt because they spend too much money. Simply consolidating your debt to a 0% credit card or any other vehicle does nothing to address the fact that these people are overspending. It will not be long before they find themselves right back where they started.

[Elgin526]

They can be a "magic bullet". I'm paying off my debt using 0% offers and what it saves me in interest is amazing! I have a set amount that goes to debt repayment each month that I make, periord. If I can do more, great, but I have a minimum that I send in, and it's not the minimum the CC offers, either! I won't have it paid off when it expires in July, so I will have to do another transfer to another 0% card at that time. But with the second offer I should have the whole thing paid off before it expires.

But I can also see how they would get some people into more trouble than they started with. You feel like you've got some breathing room, and you begin to charge up again just like you used to, espeically on those cards that have 0% interest on BOTH balance transfers and new purchases. Since it's 0%, you feel justified in not paying off your new purchases, to say nothing of not paying anything towards your balance transfer. Before you know it, you in even more debt when "the juice" starts running when the 0% offer expires.

[BTC]

I've been capitalizing on 0% balance transfer offers, with no balance transfer fees, for years. I haven't paid credit card interest for the last 5-6 years.

[autoxer]

Originally Posted by vishenda

So now you have a 0 interest credit card with twelve months to pay it off. For whatever reason, your expected financial windfalls don't come through, or required purchases offset your balance payments and your balance remains constant at $1,000 after a year. Because you've got average credit, your APR starts at 22%, adding $220 to your balances the first month, and more thereafter. You miss some payments, bringing your APR up to almost 33%. At this point, a full third of your balances are being added on to your debts every month, and you may start looking around for still more 0% APR credit cards for salvation

Just to clarify, it would add $220 to your balances over a year, not each month.

[CHUBROCK]

I just recently transferred over $15k onto a credit card that will give me 0% for the next 18 months! I should be able to pay of the entire balance by the time the intro rate expires. Just to be sure, I have already noted on my calendar when the rate expires so that if I do still have a balance, I can either pay it off or be able to secure another 0% rate. This "game" is not for those who have trouble paying any bills. As we all know, the default rate zooms up to 30% or more if you miss a payment on any bill during the intro rate. As a matter of fact, I just printed up my credit reports and I noticed that my current credit card companies have been checking my credit every month just looking for a reason to raise my rates! I have heard that they do check once in a while but according to my reports, they are checking every single month!

If you are going to get into the 0% credit card game, you better be on your toes. I have been both smart enough and lucky enough to play the game correctly for the past few years. Once I pay off the existing balance, I don't think that I will be my cards again! I haven't used a credit card for purchases that I didn't budget for in over a year!

[boefixepa]

I love these! If I am patient I will get ones with 0% for 18 months! I am currently making around $30 a month on the one I have, plus I just cashed in my reward points for a $50 gift certificate. A month before it expires I will pay the whole thing off! I just use it as a holding account to earn interest basically. But as someone pointed out earlier, you can't overspend! Every dime I spend on the card is set aside and put in a savings account. So I am never spening money I don't have. Just earning interest on it while I have the 0% rate.

[Ima saver]

I did use a 0% card for a year or two but only because I had the cash to pay my credit card off in full. then, when I finally decided to no longer carry a balance and just pay in full each month, I don't even know what rate of interest is on my cards.

[lrjohnson]

I'm not sure if I'm a fan of articles posted as forum threads.

[greedy4chips]

$1000 at 22% is $18.33 in monthly interest.

22% is the yearly rate and must be divided by 12 to determine the monthly rate.

I love 0% cards and have 1 offer for up to 16 months out currently lying on the counter.

Properly utilized they can be a great way to make some extra cash.

Improperly utilized and they can land you in the poor house fast.

[bjl584]

I just got a pre approval for an American Express Blue in the mail today. They were offering me 0% interest for 12 months. Unfortunately, they spelled my last name wrong. I have this thing that if a company can't even get my name right, then I really don't want to do business with them, so I threw the letter in the garbage. Maybe I'll get another one with my name spelled right soon.

[JoyJoy]

I love them too and used like boe said, they are well worth having!

edited to remove nonsensically stupid statement made during a mental haze brought on by lack of diet coke and sleep

[greedy4chips]

Rexdart,

Credit Cards do not work that way. After the 0% introductory rate has ended the interest rate goes up to whatever amount is stated and you begin to pay interest on the outstanding balance from then on.

Store financing for furniture, electronics, appliances does in fact work similar to your example. If you do not pay off the ENTIRE balance by the end of the contract you are smacked with the entire interest penalty! This is why they offer it, since too many people miss the deadline for whatever reason. Even in you are $1 short of completely paying it off, you are charged the interest on the full amount of your original charge for the finance period. You are also charged interest on a monthly basis from that point on.

Originally Posted by greedy4chips

Rexdart,

Credit Cards do not work that way. After the 0% introductory rate has ended the interest rate goes up to whatever amount is stated and you begin to pay interest on the outstanding balance from then on.

Store financing for furniture, electronics, appliances does in fact work similar to your example. If you do not pay off the ENTIRE balance by the end of the contract you are smacked with the entire interest penalty! This is why they offer it, since too many people miss the deadline for whatever reason. Even in you are $1 short of completely paying it off, you are charged the interest on the full amount of your original charge for the finance period. You are also charged interest on a monthly basis from that point on.

well that's a relief


I just assumed evilness

[BTC]

It probably depends on what the card issuers agreement states as to whether or not they charge back interest if the principal isn't paid off by the end of the offer period. I'm not sure I would simply assume that nobody charges accrued or back interest. Personally, I always make sure the principal is paid off by the end of the offer period.

But, maybe I'm wrong.

[abowers]

0% cards have been useful for me! I read all the fine print.
I paid off one of my cards, then carried a zero balance on it -- talked them down to a lower interest rate (by 9 points) then they offered the 0% promotional period on balance transfers, for a year. So I transferred all of my store-credit card balances onto this card, I figured out how much I have to pay each month to pay it off before the promotional period ends. I'm making approximately those payments and should be good in July 2007!

edit: I also scheduled automatic monthly payments for the minimum payment so that I don't have a chance of being screwed over by making a late payment :. ending the promotional period.

[tener]

0% credit cards are fantastic but ofcourse you have to keep your eyes open.. i find them better than loans as long as you can keep transferring them..

[Tree0164]

I paid off 20k worth of credit card debt playing the balance transfer game. If you are responsible and get them paid off the are great tactic to use.

[neatdesign]

Technically, moving a balance from lender to lender to avoid paying any interest is a form of credit card fraud called "kiting" and is considered a federal crime. However, I never really understood how this could be a crime when the lenders themselves actually promote it and essentially encourage consumers to participate in it.

I just opened a new account with Discover and transferred the entire balance of one account to it, and about half of another account's balance. It's 0% until next June, but I can extend the 0% by making three purchases each billing period starting in July.

Although the purchases will NOT be at the 0% rate (that's limited to the balance transfers), there is no minimum amount that the three purchases need to be. My plan is to purchase three EXTREMELY cheap items -- like three sticks of gum for 25¢ each -- once per billing cycle. I'll go through the self-checkout line at the grocery store so it will be easier to do the transactions. At most this will add about $2/month to my balance (the three purchases plus the minimum finance charge), which means it will end up costing me far, far less than if I had the BT balance at a higher APR.

~ Jenney