When you have a purchase of significance to make, like a brand-new kitchen appliance, or you want to stop paying high-interest charges on your credit card debt, zero percent credit cards can seem like a lifesaver.
With one swipe of the plastic or a few clicks online, you’ve now got that television you’ve had your eye on. Or if you use the no interest credit card to pay off your debt, the bills that made you nervous stop showing up in the mailbox. And since these zero percent credit cards seem to be available everywhere you look, it must be reasonable to use them as part of ongoing financial management. Right?
Is this kind of offer too good to be true, though?
Well, when they’re judiciously used for brief periods of time, these types of credit cards can bring financial relief and/or help you buy that big-ticket item. In this guide, we’ll explore some of the short-term ways that a no interest credit card can be useful, along with downsides to watch out for—some of them significant. Finally, we’ll share another strategy to fund purchases or pay off debt that might work better for your financial plan.
The Advantages of No Interest Credit Cards
There are certain situations in which using credit cards without interest is logical. Let’s say, for example, you’ve got a credit card with a hefty balance and a high interest rate. You know, though, that your income tax refund is coming soon, and plan to use it to pay off the credit card.
So, you might think, why not pay off the high interest credit card now with one that has no interest for six months, and then pay off THAT credit card with your refund check? This is commonly referred to as a credit card balance transfer, and if all goes as planned, yes, this makes good sense.
Or, let’s say you want to make a large purchase, perhaps a new desktop computer for your home office, and you have added the monthly payments to your budget, so you’ll have your balance down to zero before the credit card interest kicks in. Again, if all goes as planned, then you’ve successfully bought your computer on credit without having to dealing with any interest charges.
No interest credit cards aren’t no interest forever. They just offer 0% interest for an introductory period, often of about six months, and then the interest rate goes up. In short, it’s only advantageous to use a no interest card as a way to eliminate debt or fund a purchase if you know you can pay the card off before the interest rate rises.
The Problems with No Interest Credit Cards
Let’s take another look at the first scenario described above. In this scenario, you paid off your high interest credit card with a zero interest one. Your plan is to wipe out the balance on your new card with your income tax refund. But as you already know, life doesn’t always proceed as planned. Refund checks get delayed, cars break down unexpectedly and need emergency repairs, and so forth.
In those instances, you can ultimately lose the benefit of zero interest and get caught up in a high-interest trap. These zero interest credit cards only come with no interest during an introductory period, which is often only six months, although it can sometimes be as long as 18 months.
Once your introductory period ends, the card reverts to its “regular” interest rate and annual percentage rate (APR). It’s only human to see the “zero percent” part of the deal and not see what the regular rate would be, especially when you had a solid plan in place to pay off the balance during the no interest period.
To make the situation worse, sometimes if you have a remaining balance at the end of the introductory period, the company collects interest on the entire principal, rather than the remaining balance. So, in that case, nothing was really free.
Problems can also arise even before the introductory period ends if balance transfer fees exist. Typical fees are about 3% of transferred balances, with some as high as 5%. So if you’re applying for a no interest credit card, be sure to double-check to see how balance transfers work. If a balance transfer fee does apply, do the math and make sure it’s worth it. After all, a 5% balance transfer fee on $10,000 is $500.
Here’s another twist. Sometimes, the zero percent deal only applies to new purchases. In that case, using the card to transfer your debt balance isn’t a good idea. Read all terms closely before making any decisions. As yet another potential catch, late payments may trigger a clause that ends the introductory zero percent rate immediately with a penalty APR kicking in. These rates can be as high as nearly 30%. Seriously.
If you get caught in a cycle of balance transfers, going from one zero interest credit card to another, this can have a negative impact on your credit score. And if your plan is to close the high interest credit card you just paid off, that could also have a negative impact. Think of it this way: If you’ve had a particular credit card for several years, this signals stability to the credit bureau, especially if you’ve at least made minimum payments on time. Closing it may signal something else entirely.
Here’s a final scenario with potential landmines. When you apply for a card, you won’t know what your actual transfer limit is until the card is approved. While you might request a certain amount, it’s the issuer who decides, based on your income and other factors.
And if you planned to transfer a balance that’s bigger than what’s available on your new card, you would either need to transfer a partial amount or apply for additional zero percent credit cards. This strategy doesn’t streamline your bill paying in the least.
You’ll need to carefully navigate a timeline to get the benefits of zero interest credit cards. Most will only give you 60 to 90 days to transfer balances. If you wait too long, then the deal is off. Sometimes the balance transfer takes a week or two to process. During that time, you’ll need to make payments on your other card(s), and waiting for the balance transfer to clear eats into the time you have with 0% interest.
Popularity of Zero Interest Credit Cards
A CNBC.com article from January 2018 notes that the average person in the United States has a credit card balance of $6,375. This is an increase of almost 3% from a year ago, and that’s per person, not per household. Overall, the total amount of credit card debt in our country is the highest to date, more than $1 trillion in 2017.
People take out zero percent credit cards with the best of intentions. But, when you pay off one credit card with another, you’ll then have more credit cards available to use. The end result is often increased debt, ultimately at high interest rates. Fortunately, better options exist.
Paying Off Credit Card Debt with a Personal Loan
No interest credit cards aren’t your only option for paying off debt. You can also pay off high interest credit cards with a personal loan. With SoFi personal loans, you can likely reduce the interest rate you’re paying on credit card debt. To get a sense of what you can save, use our personal loan calculator.
There aren’t any origination fees and because there are no prepayment penalties, you can pay off your loan at any time. With a fixed-rate personal loan, you never have to worry about your interest rate going up, so you can break the vicious cycle that credit card debt can create.
And SoFi wants to help set you up for repayment success. If you lose your job, we’ll temporarily pause your payments. Interest that accrues during the forbearance period will be added to the principal once you resume making payments. Our Career Team will even help you find a new job!
Disclaimer: Many factors affect your credit scores and the interest rates you may receive. SoFi is not a credit repair organization as defined under federal or state law, including the Credit Repair Organizations Act. SoFi does not provide “credit repair” services or advice or assistance regarding “rebuilding” or “improving” your credit record, credit history, or credit rating. For details, see the FTC’s website on credit.
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