Financial Tip of the Month
Holidays and the Zero-Interest Credit Card
With the holidays right around the corner, zero- interest credit cards sound like a great deal, but are they?
With taglines like "Pay no interest on balances transferred from other credit cards!" and "Make interest-free purchases during the first 90 days!" why wouldn't you take advantage of such an offer?
Although a 0% credit card may be a wise choice for some people, the devil is in the details - and in your individual propensities as a consumer. Consider the following questions:
- Is the balance transfer really free? Yes, you may not be required to pay interest on a balance moved from one credit card account to another. But your new account may charge a fee for making the transfer. Such fees typically run from 3% to 5%. If your balance, for example, is $3,000 and you pay a transfer fee of 3%, you'll be charged $90 just to make the switch. And in some cases, the lender doesn't set a cap on this fee; it's a flat percentage. So the higher the balance that's transferred, the higher the transfer fee.
- What happens after the promotional period? You may be offered a 0% credit card now, but the offer may expire in six months. After that, the rate will likely adjust upward, sometimes substantially. So if you can't pay off the balance before the promotional period ends, you may want to deposit the offer in the nearest trash can.
- What happens if you're late on a payment? Some companies have strict terms on new credit cards that mandate substantial penalties if even one scheduled payment doesn't arrive on time. The card may be cancelled; the full balance may be immediately due; the 0% rate may vanish like the morning fog. So reading the details of the credit card agreement before you make the switch may save headaches and dollars later on.
- Are there minimum use requirements? To keep the promotional rate, you may be required to use the card at least once a month. If you don't, look out. The rate may jump or penalties may be assessed. Again, reading the fine print is crucial to making a prudent decision.
- Will you pay off the balance - really? Know your propensities. If it's likely that six months from now the balance on your new credit card will remain unpaid, perhaps it's time to redouble your efforts and concentrate on your existing account.
Source: J.P. Spillane, CPA, PA