Many Grownups look at 0 percent APR credit card offers as their ticket out of debt. Before signing up, though, ask a few key questions to see if it’s actually a wise choice.
I hate credit card debt. I hate the fact that interest starts the moment you purchase something. It stinks that credit cards have a higher interest rate than most mortgages, student loans, and car loans. And it’s no fun that the interest paid is not tax deductible.
But the worst part is that it’s so easy to get into credit card debt.
Of course, I am not alone. And when you have credit card debt, and are paying double-digit interest rates on it, it’s impossible to avoid the advertisements for cards with 0 percent APR financing that flood your mailbox, inbox, and web browser. These offers can sound great, but isn’t it just a deal with the devil?
How These Offers Work
There are many credit cards that offer 0 percent APR on balance transfers, new purchases, or both as an incentive to open a new line of credit. These offers to new cardholders extend for a limited time, which must be at least six months, but can be as long as 21 months in some cases. But with nearly every one of these offers, there is a 3 percent balance transfer fee imposed. Once the promotional financing period expires, the standard interest rate applies to any remaining balance.
Promotional Financing Offers and Thanksgiving Turkeys
I’m smart enough to know that there’s no such thing as a free lunch, so how can banks and credit unions afford to loan money at 0 percent APR? You will find the answer at your local grocery store this Thanksgiving, when they sell turkeys for 49 cents per pound—they are practically giving them away. But by limiting the offer to one per customer, these stores ensure a larger sale: They know that their profit is in the cranberries, stuffing, pumpkin pies, and the rest; the cheap turkey is offered just to get shoppers into the store.
Likewise, a new credit card user is an incredibly valuable customer to a bank or credit union. These cardholders will earn them plenty of money over the years through credit card fees, merchant fees, and yes, they hope you will be incurring interest charges after the 0 percent APR promotional rate expires. But that doesn’t necessarily mean that these offers are bad.
Two Ways to Use a Promotional Financing Offer
A free loan is a powerful thing, but these offers can be used to improve your personal finances or trap you in a cycle of debt. Ideally, cardholders are able to use the money they save on interest to pay down their debt even sooner than they otherwise could have. And if everything works out perfectly, their debt is retired before the promotional financing ends, and the 3 percent balance transfer fee amounts to far less than the interest charges would have been.
The same best-case scenario applies if they are using the promotional financing offer to avoid interest on new charges. In this case, cardholders can truly receive a free loan, so long as they are able to pay off their entire balance before the offer ends and the standard interest rate applies.
But on the other hand, too many cardholders will fall into the trap of using the offers to rationalize incurring more debt. It’s just too easy for some people to say, “Hey, it’s a free loan, so let’s buy more stuff,” or to assume the debts they rack up will be easy to pay off before the standard interest starts to apply. And one of the worst things cardholders can do is to use these offers to postpone paying off their debt, rather than to speed up the process.
By understanding how these offers can help you to pay down your debt—and how they can sometimes derail your plans—you can make the best decision for your own finances and goals.
Have you used a credit card to effectively eliminate debt before, Grownups? Share your story with us in the comments section
Jason Steele is a freelance writer
who contributes to personal finance websites
including CompareCards.com, Credit.com, Wise Bread,
and The Points Guy.