One day I get an offer from my bank for a “financial unicorn,” a zero percent introductory interest rate credit card.
Fast forward two years, and I find myself with over $26,000 in credit card debt, and my credit score is in shambles.
It turns out that my experience is not that far fetched, considering the average American household carries about $15,482 in credit card debt.
In this post, let’s explore some of the pros and cons of getting a zero interest card.
Why people cannot stop talking about 0% APR credit cards
If you are reading this, you might be on the hunt for your own unicorn. Maybe you want to finance plane tickets, get a new air conditioner for your car, or pay off those medical bills that have been following you around.
Or, maybe you are “playing the credit card game” by transferring a balance from a card with a high interest rate.
Whatever the case may be, there is a reason why these cards are so popular. Most zero percent introductory interest rate credit cards will let you do all that and more without paying any interest for 12-18 months.
That gives you a lot of time to pay off that balance before you start paying interest.
Pros:
It can help you get through a rough patch by giving you funds that aren’t laying around in your bank account. They are a great way to finance life’s “uh ohs.”
It almost feels too good to be true.
Why they can actually cost you a TON of money
There is a reason why zero percent interest credit cards are so popular, there are some major pros.
However, they can, and statistically, they probably will end up getting you in a LOT of trouble if you’re not careful. And, even the most cautious people can find themselves in a debt spiral.
"If your entire plan is simply to transfer the balance to a credit card with a lower interest, you are planning on throwing away more of your money."
That is because credit card companies know a few things that most people do not.
That know that you probably did not read the fine print. And, even if you did, you might not fully understand it.
Because, if you had, you may have discovered that a zero interest credit card are not actually all they are cracked up to be.
Just because it says “0% Interest” does not mean you aren’t accruing interest
The words “zero percent interest” do not mean what you think they mean. It turns out, they just mean that you will be paying interest on your balance later, instead of paying it monthly as you would with a normal credit card.
Here is an example.
When I first got my zero interest credit card, I bought plane tickets for the whole family. We needed to get to Europe so that my husband could be a groomsman in his brother’s wedding.
It set us back about $5,000 total. No problem, we thought, we are not paying interest on it until the following year.
So we went about our business. But then other things broke down, other big expenses came up, and to top it off, we each lost money in our jobs and businesses that year.
After our balance tallied up to above $10,000 with one month to spare, it became obvious to us that we were not going to be able to pay it off by the end of the introductory period.
When the introductory period ended, we found out that we did not owe $10,000, our balance actually climbed up to about $13,000.
That is because at the end of the introductory period, these cards charge you interest on your total balance up front.
Thereafter, they continue charging interest on top of that interest.
These cards have an insane APR rate
If you read the fine print on the offer letter for one of these cards, you may have also noticed that most these cards actually have an APR (Annual Percentage Rate) that is much higher than the average credit card your bank might offer you.
Most “zero interest credit cards” jack their APR rate up to 29.9 percent after the introductory period ends.
That is nearly twice the average APR rate of 16.71 percent.
To demonstrate what a terrible deal this is, I will enlist the help of Credit Karma’s handy Debt Repayment Calculator.
As you can see, even if you have a relatively small balance of $1,000, and you made regular minimum payments of $50, it would take you more than two years to pay off the balance, and you would pay roughly an extra $400 in interest.
But that is not all, there is more.
Your 0% APR introductory period is cancelled if you miss a minimum payment
Let’s say that you phone in your payment a day late, or you forget to set up automatic payment from your checking account. Bare in mind that little mistakes like these are fairly common with a brand new account that may not be set up properly. Alas, sorry Charlie, you no longer get to enjoy that zero percent introductory APR rate. You now pay an APR rate of up to 29.9 percent every month.
Not all cards allow you to transfer balances at a zero percent APR rate.
Before you set a plan in motion to pay off one credit card or loan with a zero percent APR credit card, make sure to check to see whether the account you are setting up will actually allow you to transfer balances at zero percent APR.
Credit card companies will often disclose that they will charge a “Transfer APR,” but you will have to look deep within the fine print, or call the company to find out what your Balance Transfer APR rate actually is.
By the way, the same goes for cash advances.
Transferring balances from a higher interest card may not save you money, it could actually set you back
Let's say you have a balance of about $15,000 on a credit card with an APR rate of about 16.9 percent. Let’s say you are making minimum monthly payments of about $400.
That means that you will actually pay something like $21,482 over the course of 54 months.
So what do you do? Of course, get a credit card with a lower APR rate. Better yet, get a card with no APR, right?
As it turns out, in most cases this does not save consumers very much money overall. In fact, it can actually end up costing you money.
Now, let’s imagine that you do transfer that same $15,000 to a card with a zero percent balance transfer APR (that means that you do not pay extra fees for transferring balances from another card).
Let’s also say that you set up an automatic transfer from your checking account into this credit card account with the same monthly amount of $400.
It will take you 38 months to pay it off and you will have paid no interest, right?
Wrong.
After your zero percent APR period wears off, usually after 18 months, your APR rate is now an adjustable rate of between 24.9 and 29.9 percent.
For the sake of this example, let's say it's on the low end at 24.9 percent.
By then you should have paid your balance down to about $10,200. But, remember that at the end of your introductory period you now owe interest up front, so you now actually owe $12,739.80.
If you pay that balance monthly, at the same rate of $400 per month, it will take you an additional 53 months, and you will actually pay $21200, plus the original $4,800 you paid during the introductory period, and you have now paid $26,000 in total.
The point that I am trying to make is that no credit card is a good deal if you have a high balance and your plan is to make minimum payments.
If you are tired of paying all of your hard earned money in credit card interest, your plan needs to include aggressively paying down your debt as soon as possible.
If your entire plan is simply to transfer the balance to a credit card with a lower interest, you are planning on throwing away more of your money.
I know this because I found out the hard way.
Remember that $13,000 I owed to the credit card company after getting a zero percent APR rate credit card? Well, we tried to transfer some of our other balances with other zero percent interest credit cards.
The result was over $16,000 worth of credit card debt on just that account alone that took years for us to shed. We also had a similar experience with another zero percent introductory APR card that wracked up over $10,000.
My credit score still has not recovered from our zero percent APR escapades.
We tried to play the credit card game and we lost, because we did not understand what kind of game we were playing.
Cons
They have a higher APR rate after the introductory period (24.9% - 29.9%).
You forfeit the 0% APR rate if your payment is late.
The 0% APR rate might not apply to balance transfers and cash advances.
You can end up paying more way more money overall than you would if you kept the balance on a credit card with higher interest.
Breaking it all down
On the surface it can seem like credit card companies are doing you a solid by offering you these zero interest rate credit cards simply for being their unicorn: an American with good credit.
But, as you can see, credit card companies are not in this to empower consumers. These are publicly traded Fortune 500 companies. Their aim is to make as much money as possible to please their shareholders.
They do this by offering you something that feels like a slam dunk to you, but could actually end up making them a huge amount of your hard earned money in interest payments.
They are literally banking on your failure to understand the complexities of the credit industry.
Being careful does not go far enough.
Do not get a zero percent APR rate credit card to finance your debt at a lower interest rate unless you have done your research and come up with a plan to pay it off before the introductory period ends.
We want to hear from you
Do you have a zero percent introductory APR rate credit card? Are you planning on getting one? Have you ever been burned by one of these cards? Tell us about your experience in the comments below.