You rely on credit cards almost every day. But do you know how they really work? Especially the ones with those tempting offers for zero percent interest? Most companies hide important info from unsuspecting customers in a sea of fine print. Here’s what to watch out for:
Zero percent interest that isn’t
Credit card companies want you to switch the debt you’re carrying on your current cards to the new card they’re selling. In return, they’ll charge you zero percent interest, usually for six months but sometimes for as long as 18 months.
The idea is appealing, especially if you’re currently carrying a large balance on a high-rate card. You can use the money you save on finance charges each month to help pay down your debt. But be sure you check to see if the zero percent rate also applies to new purchases. If not, you might find yourself stuck with monthly interest charges that you hadn’t expected.
Say you sign up for a card that’s offering zero percent interest and you transfer a $5,000 balance. Then you use the card for $500 in new purchases. The following month, you send in $700, intending to cover the new items and pay $200 toward your zero percent interest debt. The credit company won’t allow that. Instead, it will apply your entire payment to your transferred balance, reducing your zero percent interest debt to $4,300. Your purchases will be treated as new debt, charged at the card’s full rate.
Here’s how to avoid this trap. Do not make any purchases with your new card until the zero percent interest promotion has expired. Put your purchases on your old card and pay the bill in full each month, advises Robert D. Manning, author of Credit Card Nation. (But be careful not to charge so much that you’re carrying high balances on two cards.)
Or look for cards that offer zero percent interest on new purchases as well. They’re hard to find, but at press time, Discover Platinum Clear Card and BB&T Visa Platinum were advertising such an offer.
Some cards charge zero percent interest on new purchases only, making them a good deal if you’re not going to transfer any balances.
Promotion rates that end before you know it
Be sure you check what your final rate will be once the zero percent period has expired. The offer may quote a rate in the 9 to 11 percent range, but the fine print warns “oops, maybe not.” The card issuer will pull your credit history. If it’s not perfect, your regular rate may jump to as high as 17 percent or so. Alternatively, you might get the promised rate but with a tiny credit limit. Either way, the card may be less attractive than the one you have now.
What’s more, if you make one or two late payments or exceed your credit limit, you’ll instantly be bumped to a higher rate. It could be as high as 24 percent for the following six months. (This policy may be true for your existing credit cards too.)
In certain cases, though, your existing card could be a better bet than a new card. Usually, the zero percent and low-rate offers are used to attract new customers. But sometimes you can make a deal on your current card by calling the bank and saying that you plan to switch. To keep your business, the bank might give you a rate cut on your outstanding balance. This tactic works often enough to make it worth a try.
Low-interest offers with strings attached
You’ll see plenty of cards offering a 2 or 3 percent interest rate for a limited time. But they carry the same risk as zero percent offers. If you are transferring balances, be sure to check whether that low rate also applies to new purchases.
Costly transfer fees
Check these carefully. Some cards charge nothing to transfer a balance, others charge $5 or $10, and some go as high as $50. If that fee puts you over the credit limit on your new card, you’ll immediately be charged another $25 or more.
Fixed rates that end up changing
Even if your credit card agreement says the interest rate is fixed, it may not be. Read carefully and you’ll probably learn that your card company reserves the right to raise those rates at any time for any reason. If you have a great credit history, look for cards issued from banks chartered in Arkansas, where laws keep the fixed rates low. At press time, the Pulaski Bank and Trust Company (800-980-2265, www.pulaskibank.net) in Little Rock was charging 7.99 percent on its fixed card. And Simmons First National Bank (800-636-5151, www.simmonsfirst.com) in Pine Bluff was offering 8.95 percent on its Platinum Visa rewards card.
You’ll pay even less if you go for a variable rate card. Currently, offers are in the 6 to 8 percent range for people with good credit histories. Your interest rate will increase when general rates go up, but you can offset those costs simply by charging less on the card.
Many cards offer rewards for every dollar you spend. You might get “free” air travel miles or points toward “free” merchandise you pick from a catalog.
Why did I put free in quotation marks? Because you pay for rewards in the form of high interest rates and fees. Butyou can make the system work for you if you choose a card that has no annual fee and you pay your bill in full every month.
Or choose a cash-back card that automatically credits a certain percentage of your annual spending-usually up to 1 or 2 percent or sometimes as much as 5 percent-to your account. Two good cash-back choices: the Chase Cash Plus Rewards Visa and the Citibank Dividend Platinum Select.