If you’ve peered inside your mailbox lately, you’ve seen the pitch. Banks and credit card companies are offering a big fat nothing–as in zero percent interest rates–to attract customers to their cards.
The offers could scarcely be more tempting, especially to those mired in credit card debt and watching their monthly payments chip away at interest rather than principal.
Before allowing yourself to be dazzled by that little round number, however, remember the zero percent interest credit cards promise something for nothing only if used carefully. Given the many conditions attached to these offers, paying zero attention to the fine print could mean your dreams of free credit could go for naught.
In fact, that’s just the fate befalling many holders of zero percent interest cards, say credit experts.
“There are some very distinct rules of obedience you must follow if you do apply for these offers,” said Susan G. Zimmerman, Apple Valley, Minn.-based chartered financial consultant and author of “The Power in Your Money Personality” (Beaver’s Pond Press, 2002).
“The first is to pay on time. If you ever have a late payment, you’re likely to be thrown out of the zero percent offer. Another big boo-boo is to not pay at least the minimum. So if you ever pay late or pay less than the minimum, you will most likely lose the zero percent rate.”
Zimmerman, who collects and analyzes some of the credit card solicitations her family receives, pointed to one recent zero percent promotion. On that one, the rate remains in effect until the cardholder makes a late payment, when it jumps to 9.8 percent. Those with a second late payment within six months would find the rate ballooning to 19.9 percent on the entire balance.
What credit card providers know better than anyone, she added, is the often careless and chaotic methods many consumers use in paying their monthly bills. The companies are aware that statistically a significant percentage of cardholders will fail in some way to meet the provisions of the zero percent deal and be thrust into much higher interest rate categories.
Also worth examining is what the zero percent rate applies to. For instance, the rate may apply only to new purchases, not to balances, said Catherine Williams, vice president of education for Money Management International, which operates Consumer Credit Counseling Services.
Many consumers also fail to take note of the length of the introductory period. Some solicitations herald “low rates for up to a year,” but their zero percent “introductory APRs,” or annual percentage rates, actually last just a couple of months, Zimmerman said.
Yet another catch is how high the rate leaps after the introductory period ends, noted Harvey Warren, president of the Washington, D.C.-based National Consumer Council, a not-for-profit organization that helps people make intelligent choices in resolving credit card debt.
“Does it become 9 percent, 14 percent or 18 percent?” Warren asked. “We’ve seen some cards that jump to 35 percent. Unfortunately, people run up a balance and because it’s zero percent they don’t care. And then the introductory period ends and they have an interest rate nobody can pay.”
Of course, all these points are moot unless you actually qualify for a zero percent interest card. Many consumers don’t. People often assume those with bad credit scores are penalized, but it’s more accurate to say good scores are rewarded, Warren noted. Consumers are rewarded with special inducements because they have good credit scores, which reflects the fact they use credit wisely and responsibly.
“This is one of the places where consumers get rewarded for being good consumers,” he noted. “They get to take advantage of a zero percent interest rate.”
Assuming you’re one of those people, make sure you use your zero percent interest rate credit cards to your maximum advantage. That begins with learning exactly what the offer entails before applying, Williams said.
“This is the time to really sit down and read the fine print,” she said. “Most [credit card providers] have 800 numbers, so call and ask for clarification of terms. Use their nickel, do it from your armchair and be a well-informed consumer.”
While the fat goose egg may tempt you to respond to a number of zero percent credit card offers, don’t fall into this trap. Every time you apply for credit cards, your application is reported to the credit bureaus.
“A lot of applications for new credit cards, and transferring of balances from one place to another, may appear as a negative rather than a positive in the calculation of your credit score,” noted Sally Hurme, lawyer in consumer protection with Washington, D.C.-based AARP.
When you identify an offer you want to apply for, hold on to the separate sheet that reads “Rate, Fee and Other Cost Information,” Zimmerman said. That page essentially states that if you accept the zero percent credit card, you agree to all the conditions listed, and also agree that the conditions are subject to change.
“The best thing I can recommend is read all the literature at least once,” she said. “Have a highlighter pen in hand, and know when the interest rate expires. And if you know you can’t pay it off, at least know what the next interest rate is going to be.”
Also be on the lookout for any late payment fees. Many cards charge flat late payment fees of $15 to $35 per payment. With the lower fees assessed on balances of up to $150, you could conceivably pay a $15 late payment fee on a balance of the same amount, Zimmerman noted.
In addition, keep in mind credit card rates are negotiable, and you may be able to influence the rate you’ll be paying when the zero percent introductory period elapses. Your goal is to ensure the rate you’ll have after the introductory period is as good or better than your old card’s rate.
“Call them up and say, `I’m a good customer, I’ve got a good score. How much do you want my business? Make me an offer,'” Warren said. “People are astonished the bank will talk to them. They want your business. Otherwise, why would they offer you a zero percent interest rate?”
Get rid of the old card
After you transfer balances from the high interest rate card to your new zero percent card, make sure you cut up the old card and throw it away. Don’t make the mistake many do of starting to use the fresh credit line now available on the old card, Warren said.
Next and most important, approach this as a golden opportunity to reduce your balance. Why golden? Because the entire payment you make will go toward the reduction of the balance, not to interest.
“That’s a wonderful opportunity for the consumer getting in trouble to put out that burning interest fire and start chipping away at the balance,” Warren explained.
Pay as much as you can as soon as you can on your new card, because the zero percent rate period won’t last forever. According to Williams, consumers often fail to heed this advice, continuing to make minimum monthly payments after moving from a high interest card to the zero percent card.
“So they’ve gained nothing,” she said. “Instead of paying, say, $50, this is the time to pay $150 to $200, because it’s all going to the bottom line.”
Finally, if the bank or card company you’ve been with a long time hasn’t offered you a zero percent rate, it may be best to ask the company for that rate rather than switch your balance to another card offering zero percent.
Tell the company you’ve received another offer and explain you’d be interested in staying put if they match the offer, Williams suggested.
“Down the road when you really need something, maybe a capital loan, the more information they have about the relationship with them, the better your chances they’ll be willing to work with you,” she said.
“They’re a service company. The longer relationship they have with you, the more services they’ll make available to you.”
