One of the newest ways credit-card agencies try to get new customers is by offering the 0 percent introductory annual percentage rate (APR). Buying now and paying no interest for six months to a year sounds great, yet the reality of these credit cards may not be as pretty as their plastic exterior.
Hidden Transfer Fees
Be careful when transferring balances from one credit card with a high interest rate to a 0 percent credit card. Balance transfers generally come with a price, warns a 2003 Newsweek article, usually at 3 percent of the transferred balance. To put this in perspective, let's say you want to move a $2,500 debt from a card with a 10.2 percent APR to a 0 percent credit card, which has a transfer rate of 3 percent. That means rather than paying $21.25 (2,500 x 0.102 /12) a month in finance charges, you agree to take one charge of $75 (0.03 x 2,500) and not have to pay any fees for up to a year, depending on the length of the 0 percent rate. This will benefit you if it takes more than three months to pay off the $2,500 balance, but only if you pay off the balance before the end of the 0 percent introductory rate.
Cash Advance Fees
While the APR on a 0 percent credit card may be zero, the cash-advance rate often is much higher, according to a 2009 CNN Money article. In other words, if you decide to take out a cash advance of $1,000 to pay for rent one month, you could be hit with a 3 percent cash advance upfront fee amounting to $30 (1,000 x 0.03). On top of that, you have to pay a cash-advance interest fee of 12 percent or higher, making an additional debt of $120 (0.12 x 1,000) or more if you neglect to pay off your cash advance on time. The 0 percent credit-card rate applies to the APR on normal balances, but it does not apply to cash advances.
End of the Introductory Rate
Be aware of how long you wait to pay off your 0 percent credit card. A 2008 article in The New York Times notes that 0 percent rates lure borrowers with good credit scores, regardless of their ability to pay off the debt when the rate expires. In fact, some college students rack up a hefty balance, not worrying about paying it off because of the 0 percent deal. Then when the time comes and the true APR kicks in, the monthly finance charges begin to add up. Even worse, if the cardholder misses a payment or make a late payment, his APR may shoot up higher than 25 percent.
Benefits
Invest in 0 percent credit cards if you know you can pay them off before the introductory rate ends. Zero percent credit cards do make a good deal for some borrowers. If you can pay off your debt within the six or 12 months that your rate lasts, then you will save money over a credit card that will accrue finance charges during that time.
Finding the Right One
Search wisely for the best deals, especially on low APRs that follow the introductory 0 percent rates. Applying to too many new credit cards, or opening too many accounts, will hurt your credit score. So invest in one 0 percent credit card that works for you, considering both the APR following the 0 percent rate and the benefits of the rewards program. That is, aim for a 0 percent credit card that earns you discounts on gas, groceries and most other purchases you would have made anyway.
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