Nothing to it: The secrets of zero percent credit card offers
Sean MacEntee, Sean MacEntee via flickr
Jelena Ewart found herself in New York City without money. Her new job, and its accompanying paycheck, wasn't going to start for a few months.
"Being the proud college graduate," Ewart says, "and feeling all financially independent and capable, I didn't ask my parents for help. Instead, I got a 0 percent credit card."
She bought a modest bed and wardrobe from Ikea. That was about it in her apartment.
"I was very disciplined about it," she says of her card use, "and I never carried a balance in my life after that one time with a credit card."
Ewart still spends a lot of time thinking about credit cards, however, as the credit card and banking manager for NerdWallet, a financial and consumer information website based in San Francisco.
Zero interest credit cards, particularly zero interest balance-transfer credit cards, are the rage now with banks that are offering the cards for longer and longer periods, some for as long as 18 months. Economic conditions and attempts to capture the best customers have credit card issuers in a battle that may be a good deal for some consumers — as long as they watch out for the "gotchas."
"So try walking into a bank and asking for a $5,000 loan for 0 percent," Ewart says. "They will laugh you out the door. So the deal credit card issuers are offering is pretty outstanding — as long as you can commit to paying it off before the promo is over and as long as you are responsible enough to not keep racking up debt and carrying it."
History of nothing
Low-interest introductory offers are not new. Ben Woolsey, president of CreditCardForum.com, a website that reviews credit cards, says such offers have been around for about 20 years. When Woolsey started in the credit card industry in the mid-1990s, he says, the interest rates were higher and so the introductory rates for credit cards were around 9.9 percent. The idea was to lure customers with a low rate, and the card issuers hoped to make back their money when the regular rate kicked in.
As time went on, the introductory rates kept falling — eventually hitting 0 percent about 10 years ago.
Then the recession jumped in.
As Greg McBride explains, credit card companies were hit particularly hard by the downturn. The debt was unsecured, and defaults were huge. "They tightened credit and only preferred to lend to the highest credit quality customers rather than lower credit quality customers," says McBride, chief financial analyst at Bankrate.com, a consumer financial services company based in North Palm Beach, Fla. "Even though the economy has improved, card issuers still do not have much of an appetite for credit risk."
What nothing looks like
Zero interest cards have many iterations. The best card would be one that did not charge any fees to transfer a balance from another card. Although Chase offers this with its Slate card, it is very rare. "Most card issuers charge a transaction fee, averaging around 3 percent, but it can be 4 or 5 percent," Woolsey says. "So do the math to make sure you save enough interest with the 0 percent offer to offset the fee."
In the past, he says, issuers capped transfer fees at $50, $75 or $100. Today, the fees are uncapped. A 3 percent fee for transferring $10,000 will cost an extra $300.
Some cards offer 0 percent interest for transferred debt but not for purchases. Others offer 0 percent on both transfers and new purchases. Some might have cash-back rewards on new purchases. It is also good to compare the base rates, the interest that will be charged on cards once the introductory period is over.
Andrew Schrage, editor of the Money Crashers financial website, says the cards are not without risk.