If you have decent credit you will get zero percent interest credit cards offers in the mail along with some cards that have large rewards points sign up bonuses. If you are carrying any credit card (revolving debt) and qualify for a zero percent offer it could be a great way to save on some interest, but it’s important to carefully plan how to get the most benefit of the offer.
At a first glance if you have $10,000 on a card at 20% interest you are paying $2,000 a year interest or $167 per month. Or if the washer, dryer and refrigerator all seem to be dying at the same time signing up for a zero percent card to spread the cost over 12-21 months could make sense. Note that a zero percent card from a bank is different than a deferred interest zero percent card from a retailer. A zero percent offer from a bank will accrue no interest until after the promotional period is up. A deferred interest card will accrue interest from the moment you make the purchase and if the balance is not paid in full by the end of the term all the interest will be due. This is why I strongly caution against using deferred interest store cards/ accounts.
With the $10,000 credit card balance I’m sure everyone would love to turn that into zero and get an extra $167 to throw at the principal balance. With all credit card offers it’s important to read the fine print. Some are 0% on purchases and balance transfers made within the first 90 days. Some have balance transfer fees as high as 5% and others have no balance transfer fees. The short answer is not all cards are equal.
The first decision to make is are you going to take advantage of a balance transfer or a promotional purchase APR. If your monthly credit card spending is $1,500 and your outstanding balance is $6,000 it can make more sense to go with a purchase APR card since they tend to have longer time periods at zero percent. If you go this route as soon as you receive the new card use it for any and all expenses you can. Then take the cash that would have paid those bills and pay the high balance credit card. After 4 months of putting $1,500 on the new card and then paying the minimum you will have paid off the old card and in some cases still have 17 months of zero percent interest to enjoy.
For larger balances it may make sense to look for a card with a low balance transfer or waived balance transfer fee. That way you could transfer the whole outstanding balance immediately.
An example comparing a balance transfer vs. purchase offer:
The key to deciding which offer to take is if you think you will be able to pay off the outstanding balance by the end of the offer. If you can pay off the 10k in the first 10 months then the balance transfer option will be best as it will only cost $500 for the transfer fee compared to the $770 in interest for the purchase transfer option.
Alternatively if you don’t anticipate being able to pay off any of the outstanding balance after the first 12 months you are right back where you started after a short 12 months looking for another balance transfer. Where with the purchase option you have another 9 months to make payments before you start to owe interest. If at month 14 you proactively open a new zero percent purchase card then you can have the balance completely transferred by month 21. With this approach of opening a new zero percent purchase card every 14 months one can essentially keep their balance outstanding at zero percent forever.
Things to keep in mind before attempting this:
- You will need a very high credit score to qualify for 0% offers
- You will need to have a plan to pay off the debt or move it before the offer runs out
- You need to have the discipline to not ramp up spending on other cards uncontrollably
With all the right planning one can save thousands in interest per year by using the offers credit card companies mail to you. Don't forget to also take advantage of rewards points bonuses which we discuss in another article