The Trap of Zero Percent Credit Cards

Posted on March 6, 2010
Filed Under Credit Cards

Are you still getting those zero percent credit card offers in the mail? I am. In fact, I can’t remember a time when I didn’t get them. My wife and I were thinking back the other day and realized that even in the days when our credit was poor or non-existent, we still received those offers. What’s the deal? Well the deal is that these little 0 APR credit cards are great loss-leading money makers for the credit card companies – still.

That’s because they hook you into signing up with what appears to be an attractive, beneficial opportunity and then they make you walk a tightrope when it comes to your bill paying. If you don’t watch your credit card purchases carefully, you can slip and fall off that tightrope and there’s no net to catch you. You can kiss your low interest rate goodbye and say hello to higher payments. Here’s how it works.

Zero percent interest credit cards are only zero percent on the surface. You see there’s no guarantee that you’ll receive that percentage in the first place. There’s language embedded in every offer letter which spells out that the interest rate is available at the credit card company’s discretion. That means if they don’t like your credit profile they won’t offer you the big old zero. They also might not offer it if they think you don’t have enough balance to transfer over from another card. The reality is that they may not offer you a 0 percent credit card for any reason at all – and they don’t have to tell you why.

Then there’s the time frame. Most credit cards at zero percent have very short life-spans. The low percent only applies for a finite number of months – for instance, maybe only 5. After that, your balance starts accruing interest at whatever the “nominal” rate is. So while it’s true that a zero card can give you some room to breathe when you’re pinched between all of your outstanding debts, it’s also true that you’ll run out of air a lot sooner than you think. So if you’re looking to eliminate credit card debt, this is not the best way.

Let’s not forget what the great rate applies to either. The zero in zero interest credit cards typically only applies to balance transfers. That means that any new item that’s purchased using the card will accrue interest at the nominal rate. On the surface that doesn’t sound bad but if you were using the zero balance offer to reduce your payments and give yourself some credit card relief, charging more and running your balance up more will only worsen your problems when the low rate changes. And change it will.

For sure your rate will change when you complete the introductory period but it can change well before that end date and quite drastically too.

If you make a late payment (and we’re talking late by one minute) your benefactor credit card company will legally be allowed to raise that beautiful rate of yours to whatever the law will allow. This is euphemistically known in the banking world as “a promotion turn-off event.” Your rate could go from zero to 12.99% overnight. Or it could go to 20.99%. It could even shoot up to 29.99% or higher. And that percentage will apply to your entire balance making your minimum payments skyrocket and your spirits plummet.

You can also void the 0 percent introductory rate by going over your credit limit for even just one day in a billing cycle.

This is the real trap of credit cards with zero percent interest. The credit card corporations know full and well that most consumers aren’t disciplined enough to manage their credit card usage and payments with iron-clad self-control. To do so, one would almost have to have a “no cash” mindset. They know that most will fall off that tightrope and the ones that don’t will probably just carry their balance along with a new interest rate anyway – and they’ll just fall off the tightrope somewhere farther along the line.

Their billing practices have contributed to this exact kind of thing too. In the past they’ve mailed out credit card bills so that they arrived with as little time before the due date as possible giving you less time to make your payment. They also generally move your due date around every billing cycle so that it almost never falls on the same day of the month two months in a row; that makes it difficult to get into a bill-paying rhythm.

They don’t do you any favors when they process your payments either. For instance, you may think that you have until midnight on the due date for your payment to be credited, but you probably really only have until 5:00 p.m. on the due date, and that’s probably 5:00 p.m. Easter Time too. That means that if they can’t get to the processing of your payment by the end of business that day, your payment will be late. And if you charged anything on that date, they’ll process those charges before they’ll process your payment which could artificially push your balance over your limit and kill your great rate as dead as a door nail.

Over the years credit card companies have systematically taken most of the air out their interest free credit card offers. The offers today are mere shadows of their former selves. In the past they used to hold some benefit for the consumer but no more. They make it harder not easier to manage your finances (unlike prepaid debit cards) and they’re filled with enough danger to warrant a “thanks but no thanks.” Beware of the trap of zero percent credit cards

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