Take the Bait of a 0% Credit Card?
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"Here's a $5,000 loan -- interest-free -- for at least a year! Apply for a 0% credit card today." That's what roughly a quarter of credit cards essentially are offering these days, according to a first-ever survey by CreditCards.com, a Bankrate-owned website.
No-interest credit cards, which are interest-free for a limited time, are more common than they were just two years ago. Card issuers want to beef up their customer counts and are offering zero percent credit card promotions to bait Americans who don't pay off entire balances every month or who want to slash the interest cost on existing card debt.
There's no doubt these credit card offers are enticing and can be a good deal if used correctly. But before clicking or checking "I accept" to get your new zero percent credit card, consider these five tips to make sure your decision is the right one.
Know That You Might Not Even Qualify
Just because the no-interest credit card offer showed up in your mailbox doesn't mean you'll get it, says John Ulzheimer, president of consumer education at credit monitoring service SmartCredit.com. Issuers prescreen before sending out their pitches, but your credit score could change for the worse by the time you fill out the application.
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Issuers want cardholders who pose the smallest risk of default, so consumers typically must have a great FICO credit score -- well into the 700s -- to qualify for a zero percent credit card, Ulzheimer says. Those with credit below the optimal standard may still qualify for a low interest rate, but it might not be zero.
Finally, even if you qualify for zero interest, watch your financial behavior during the introductory period. If your credit slips, you may be hit with a relatively high interest rate after that teaser period expires, Ulzheimer says. If you have a remaining balance at that time, the interest could sting.
Sign-Up Bonus Could Trap You
Credit card sign-up bonuses can pad your miles or rewards points right out of the gate, or even plump your wallet almost immediately if it's a cash-back offer. There's a good reason that nearly half the no-interest credit cards in the survey offered a sign-up bonus. They're sexy and can be moneymakers for the issuer.
But remember: Bonus goodies lose their value when you start charging unnecessarily just to get the incentive. Many bonuses require cardholders to meet a spending threshold within a specific time frame.
If you spend more than you typically do to get the incentive, you run the risk of getting stuck with an outstanding, rolling balance. And if you carry that balance until the end of the introductory period, guess what? You'll have to pay interest.
The risk of paying is higher if the credit card offers zero interest only on balance transfers, but gives a bonus for purchases. If you spend enough to get the bonus, you'll be charged the purchase interest rate almost immediately, if you can't pay off your balance entirely each month.
Find Out About the Go-to APR and Annual Fee
Sure, a new credit card looks good with zero interest. But how will it look after the intro period ends and the rate goes higher?
Consumers should always consider the go-to annual percentage rate, or APR, as well as other card features such as the annual fee and rewards program, says Bill McCracken, CEO of Atlanta-based Synergistics Research Corp. If the go-to APR is higher than your current credit cards, it probably doesn't make sense to use the new card after the intro period expires, especially if you revolve balances. The same is true if the annual fee is too much.
And don't forget rewards. Will you use that program after the zero percent interest deal ends? Or, do you have another card with better rewards?
It's possible to open a card to take advantage of its teaser period perks and then close it, but that strategy comes at its own cost.
Your credit score takes a small hit every time a card issuer pulls your credit report to see if you qualify for a new card. A new card also shortens the overall age of your accounts, which dents your score. Lastly, closing an account reduces the amount of available credit, another ding to your score.
Balance Transfer is a Balancing Act
The best way to take advantage of a zero percent credit card is to pay down a huge debt transferred from an existing credit card during the introductory period, says Ulzheimer of SmartCredit.com.
The key is to make sure the math works in your favor. Most credit cards charge a balance transfer fee of about 3% of the amount transferred, so keep that in mind if you're moving over a high balance.
Also, make sure you can pay off your debt (or reduce it substantially) by the time the new card's zero percent intro period is up. Otherwise, you'll be stuck paying interest, possibly at a higher rate than what was on your original card.
Finally, you may not be able to transfer the entire balance to the new card, says Linda Sherry, director of national priorities at watchdog group Consumer Action.
"Your balance may be (so) large that the new issuer won't accept it," she says.
Only those with "stellar credit" get big credit lines for balance transfers, Sherry says. So, check the fine print on card offers to see if there are any caps on balance transfer amounts.
Beware the Purchase APR Pitfall
Some spendthrift cardholders may find a no-interest credit card for purchases will tempt them to buy more than they should during the introductory period. And if you end up revolving that balance through the end of the teaser time, you've just racked up debt that will accrue interest, possibly at a higher rate than your other cards.
Zero percent credit cards on purchases are a good idea only for consumers who plan to make one big buy, such as an appliance or furniture that's beyond their monthly budget, and will pay it off during the interest-free period, says McCracken of Synergistics Research.
"If it's an amount a consumer can pay off during the intro period, take advantage of it," he says. "Divide it up in equal payments."
Of course, the retailers themselves often offer these types of short-term, interest-free deals, but the rates after the grace period ends are often "Draconian," says McCracken, even compared with the highest credit card rates.