Guide to Credit Cards: Low Interest Rate Credit Cards
Credit card companies make outsized profits on lending money to their customers at healthy interest rates. One of the ways they encourage people to carry balances on their credit cards is by offering low or zero percent interest rates for limited time periods. After the "introductory offer" expires, the interest rate climbs to a level far higher than many other types of loans. And customers find that if they can't pay off the debt in time, they begin to incur heafty interest charges.
Understanding how credit card companies make money can help you to use their products to your own advantage. Zero interest rate credit card deals offer you, the wise customer, an opportunity.
Should you borrow money on your credit card if you are offered a very low or zero percent interest rate? Generally, the answer is "no". The reason is simple. You should resist the temptation to spend beyond what you can afford. Even if you don't have to pay interest on the debt, at some point you'll have to repay the debt. And you don't know when that will happen, or what other financial demands you might face before the repayment date arrives.
But there are situations where carrying a balance on a credit card at zero percent interest makes sense. If you already have credit card debt, you'll know from this Guide that you should try to repay it as quickly as possible, and never again borrow money from a credit card company. But repaying it "as quickly as possible" isn't always easy. What if it will take you six months or a year to pay off your credit card balances?
That's when zero interest rate credit cards become useful. You can transfer your outstanding credit card balances to a zero interest rate credit card for the duration of the "special offer". You can find 0% balance transfer offers advertised on the Web. Close to the time the offer is set to expire, you can transfer your outstanding balance to another card offering a limited-time zero percent interest rate. You're buying time at no cost.
But you need to be careful when you do this. Specifically, watch out for the following:
1 Avoid "balance transfer fees". Credit card companies often charge fees for balance transfers, and disclose these fees in the small print of their customer agreements. You might think that you're getting a free loan, but if the credit card company charges you 3% of the loan as a one-time fee, you're not paying zero percent.
2 Zero percent interest doesn't get you out of debt. The only way to get out of debt is to pay off the amount you owe. Getting a zero percent interest loan from your credit card means that you're not paying interest on the loan, but it doesn't mean you're paying off the loan. Make sure that you repay the loan as fast as you can.
3 Don't be lulled into spending more. A zero percent interest loan from your credit card is a great deal. It's easy to interpret the free loan as free money. But it's not. At some point, you'll have to repay the amount you borrowed. If you let the zero percent loan lull you into spending more, you'll get further into debt.
In summary, you should approach loans from credit card companies with great caution. If you're trying to pay off existing debt, then you can use zero percent offers to your advantage. But be careful!
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