Credit card companies are always looking for new customers, and one effective strategy for getting them is to offer interest-free deals. With the typical cost of borrowing on a credit card well above 10% APR, paying no interest sounds like an excellent deal. However, it is important to understand the offer fully before diving in.
What are these credit cards offering?
Credit cards are never interest-free forever, and that is the critical part to remember when considering getting a new card. What the credit card companies are offering is an initial promotion where you do not have to pay interest on some or all of your balance. The details depend on the particular offer, and there are several types you might find.
Most credit cards offering the interest-free perk will waive interest charges so you do not have to pay them at all for a specified period.
However, retail stores interest-free financing promotions are often credit cards with deferred interest. With these, you do not have to pay interest if you pay off the balance within the promotional period. During that promotional period, however, you are accruing interest charges and they will be applied if you do not pay the balance in full by the end of the promotional period. Often, those interest charges are at a much higher interest rate than offered by typical bank or credit union credit cards.
What is the credit card company’s goal?
The credit card company is looking for a long-term customer who will use the credit card on a regular basis. The interest-free offer helps the company motivate you to put the card in your wallet, and once it is there, they can make money when you use it. For example, every time you swipe your credit card, the issuer collects a fee from the retailer. In addition, the credit card company will begin to charge interest on any existing account balance after your promotional interest-free period has ended.
What should you consider before you apply?
- Qualifying for the card: You will need to have a high credit score, usually well above 700, to get the advertised 0% interest rate. If you are not deemed creditworthy, you may instead be offered a card with a less attractive introductory interest rate. Check the fine print before using your card to ensure you know what rate you will be paying.
- Credit card costs: You should have a detailed understanding of the terms of your credit card agreement. Within some agreements are items that could cost you. For example, if you are 60 days late on a payment during the introductory period, your low rate could suddenly jump up to a penalty rate. Those rates could be as high as 30% APR on some cards. Also, you need to pay attention to the different interest rates you may incur on balance transfers, new purchases, and cash advances.
- Repayment terms: Understand how the cards repayment terms work. If you transfer account balances from another card, obtain a cash advance and make purchases with the card, all of those items may be at a different interest rate. With some card offers, monthly payments will go towards the balance with the lowest interest rate, and only after that item is paid off is your payment applied to balances at higher interest rates.
- Balance transfer fees: If you are planning to transfer a balance from another credit card, pay attention to the balance transfer fees that you will typically incur. You should expect to pay between 3% and 5% of the balance you transfer. That cost gets added to the balance on your new credit card. Paying the balance transfer fee can still save you money, depending on your existing credit card's APR and the length of the 0% rate period. You'll benefit more if you pay off your account balance during that introductory period
- Other costs: Some credit cards, especially rewards cards, charge an annual fee, so note the amount of that. Also, if you plan to keep the card after the promotional period is over, know what your interest rate will be. If you intend to close the account, be aware that continually obtaining new cards, keeping them for a year, and closing them will damage your credit score.