Nothing to it: The secrets of zero percent credit card offers
"One of the 'gotchas,’ ” Schrage says, "is that you might be subject to a penalty APR if you make just one payment late."
Who gets nothing
Before the recession, offers for 0 percent cards were extended to a wide variety of consumers. Now, the offers have narrowed.
"Unfortunately," says Ewart with NerdWallet, "they are not really catering to the folks who might stand to benefit the most from them."
Instead, the offers are going to people with the best credit scores.
Exwart explains credit card companies make the bulk of their money from interest and other fees. They want to attract people who will keep balances on their cards — even when the 0 percent offer period is over.
"Usually, if you carry a balance in the past," she says, "you will likely do so in the future. And since carrying a balance is the most profitable thing you could do for the banks as a credit card user, they are very interested in attracting exactly the kind of person who tends to carry a balance but also tends to have really good credit."
Odysseas Papadimitriou, CEO of CardHub, a personal finance website based in Washington, D.C., says people have a misconception that people with large balances on their cards have bad credit scores.
"If you have bad credit, there is no way you can rack up a big balance because no one will extend you credit," Papadimitriou says. "The people who carry balances are the people with good credit because they are the people who pay on time. The majority of the balances of outstanding credit card debt is in the hands of people with good or excellent credit."
Just because people have a good credit score, however, does not mean they are being financially responsible, Papadimitriou says.
"Credit scores are interesting," Papadimitriou says. "They are good until they are not. They are good, and then you miss a payment, and they go down the drain. Unfortunately, that is the problem with debt in general. Everything works out until the music stops."
Battling for nothing
Because the interest rate the Federal Reserve offers to banks is near zero, banks are able to offer the 0 percent interest periods with little risk, says Woolsey.
"It is essentially a way to lure people into taking a card," he says. "They'll take losses for a while and eventually make money on the interest on what balance is left over. In today's economy, they will break even right away."
After so much loss in the recession, the prospect of getting the best customers with little risk is creating a brisk climate of competition.
"Credit card issuers are still fighting tooth and nail among themselves to grow their market share with consumers that have very good credit quality and pose a minimal risk of default," says McBride with Bankrate.com.
Advice about nothing
If people are eligible for the offers, they can be a good deal, the experts say. But they also warn about using the 0 percent cards responsibly.
First, McBride says, do the math to make sure the transfer fee doesn't wipe out the advantage of the 0 percent offer.
"My advice to consumers," McBride says, "is to use the 0 percent offer period to make headway on the debt. Have a game plan to pay it off before it expires."
Papadimitriou says it isn't a good idea to plan to go from one 0 percent offer to another when the first expires. With a changing economy, the offers may not be available in 12 or 18 months.
The types of 0 percent offers have stabilized over the past six months, according to Papadimitriou. "They don't show any signs of getting any better," he says. "This is the time to take advantage of them because the offers may start deteriorating. When you see a stabilization after you had a rise for a while, you may now want to take advantage and not risk losing a really good deal."
All the experts agree that people should shop around and pay close attention to find the best card for their circumstances. Ewart, however, doesn't think the idea behind low introductory rate cards is going to go away.
"It's kind of the oldest trick in the retail book," she says. "You give a free sample, and you earn someone's loyalty for life. So I don't think these kinds of cards are going anywhere."