How 0-interest cards can save you money
By Jennifer Nelson
May 19, 2016
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No interest promotional deals can be a big help if you’re transferring a balance or just trying to pay for a big purchase, but if you don’t play the game right, you may find yourself slapped with interest fees.
It’s also important to know that some cards offer that 0 percent interest only on new purchases, and some offer the same deal on both balance transfers and purchases.
All issuers limit these interest-free periods to 6, 12, 15 or — in some cases — 21 months.
With 0 percent interest cards, “There are really two aspects: There is 0 percent interest on your balance transfers, and 0 percent interest offers on purchases,” says Troy Dennis, head of credit card product management and acquisition for TD Bank.
So what you should know before applying for a 0 percent interest card? Whether transferring a balance or buying a big-screen TV with a 0 percent interest card, pay particular attention to:
Balance transfer fees
Look for an offer with no balance transfer fee. Typically, balance transfer fees range from 3 to 5 percent of the balance being transferred, says Dennis. While rare, some cards do go the extra mile and don’t charge a transfer fee.
Length of the offer
The longer the introductory 0 percent interest term, the better. If you can snag a 21-month 0 percent card, “You should do it with the mindset that you plan to pay that balance off by the time the intro rate is over,” says Dennis. That advice applies to any 0 percent card, not just the one with a 21-month introductory rate.
Know what your interest rate is likely to be once the introductory period expires. Like the BankAmericard Visa’s regular APR of 11.24 to 23.24 percent, most 0 percent cards have a range of interest rates, depending on the cardholder’s credit score. The Barclaycard CashForward World MasterCard, for example, charges 15.24, 19.24 or 23.24 percent variable interest after the introductory period. Cardholders with FICO scores above 750 likely will qualify for the lowest interest rate, and applicants with scores above 720 may net the 19.24 rate. If your credit score is in the mid-600s, you likely qualify for the highest interest rate because the issuer considers you to be a greater lending risk.
Keep track of the introductory period’s expiration date
Note the date your introductory offer expires. “When you finally realize your rate is expiring and you haven’t done the due diligence of paying down that balance, you could be sitting on a double-digit interest rate,” Dennis says. That “can counter some of the savings you had when you took advantage of that 0 percent” interest rate. It’s best to pay off the balance an entire month prior to the promotional expiration date to avoid any slip-ups.
Don’t get deeper in debt
A 0 percent interest introductory offer easily could lead you deeper into debt you can’t afford. “Some people see these offers as ‘free money’” says Dennis. These 0 percent interest cards aren’t free money, but a free interest way of paying something off — if used wisely.
Don’t play the balance transfer circle game
Some consumers try what’s called the balance transfer circle, Dennis says. They open a new card to transfer a balance and when the rate expires, they open another card and transfer it again.
“Doing one balance transfer to a card with a 0 percent intro rate, and paying a debt off more quickly, can be a good idea,” says Kevin Gallegos, vice president of Phoenix operations for Freedom Financial Network. Doing it more than once make suggest to creditors that you’re dealing with financial problems.
How balance transfers can affect your credit
After a few back-to-back balance transfers, you either may not get the credit line to cover the transfer because your credit utilization rate is too high, or you may not get approved for another card because you’ve opened up too many cards and your FICO score has dropped, Gallegos says.
Credit bureaus usually calculate credit utilization — the amount of available credit you use — for each credit card you have. If you transfer a balance to a card with a lower credit limit, your “available credit” might go down, hurting your credit score. Plus, new credit card applications result in a “hard pull” of your credit, which also dings your scores. And adding new cards lowers your “credit age,” or length of time you have had each credit card, which is also a factor that plays into your credit score formula.
Bottom line: 0 percent interest offers and balance transfers can put money in your pocket, but only if you’re smart about your overall spending habits and pay off the debt before the introductory period ends.