In today’s credit card market, 0% APR offers are plentiful and easily accessible to just about anyone with good credit. Virtually every credit card issuer (and every credit card offer) will feature a zero APR. Paying 0% interest on purchases and balance transfers is a great way to save on interest charges, but for most of us, the savings end when the intro period is over. There are some drawbacks to switching credit cards on a regular basis, but for the savvy consumer, applying for a new 0% APR credit card is definitely worth considering.
I’m not the first, and I definitely won’t be the last person to write about the huge amount of money you can save by taking advantage of 0% APR credit cards. People have been using these offers to borrow interest-free and pay down debt for years. Although these cards should be used with caution, here are two situations where a 0% APR credit card may be beneficial:
Situations to Use 0% APR Credit Cards:
- Paying Down Credit Card Debt – It may seem counterproductive to apply for a new credit card to pay down credit card debt, but by eliminating interest charges with a 0% balance transfer, 100% of your monthly payments will be applied directly towards the principle of your account. If you’re able to maintain your current monthly payments, you’ll reduce your debt even faster with a 0% APR. The key is to avoid new purchases while maintaining regular payments.
- Saving on Large Purchases – If you’re considering a large purchase, such as a flat screen TV or new furniture, avoiding interest for 12 months or more can be extremely beneficial and save you lots of money. And unlike the interest-free financing provided by merchants, your credit card will provide extra protections such as limited liability and extended warranties.
How Much You Can Save
Let’s look at an example of how much you can save with a 0% APR. First, let’s assume you have $10,000 in credit card debt (between two credit cards) that you’re trying to eliminate:
2ND CREDIT CARD: 15.99% x $5,000 = $800 in interest charges per year
If you transferred this debt to a 0% balance transfer credit card, you would save $1450 on interest over the first year. Even with a 3% balance transfer fee (common with most 0% offers), your savings would only be reduced by $300 – leaving you with $1050 in eliminated interest charges. Assuming this was applied to your balance, that’s a lot of extra debt that could be eliminated in 12 months!
Proceed With Caution
While savvy consumers continue to take advantage of 0% APR credit cards, there are just as many people who get caught up in the credit card companies’ trap. Although the main objective of a 0% APR is to get you to switch credit cards, it’s also used to entice you to make new purchases and create higher interest charges – after the intro period ends. If you switch credit cards without a plan, you’re likely to be the next victim of the credit card company’s tactics.
Factors to be aware of:
- Balance Transfer Fees: Over the last several years virtually every credit card issuer has incorporated balance transfer fees into their 0% APR offers. Averaging between 2 and 3% of the total balance transferred, it’s a sure-fire way to limit your savings. But even with a balance transfer fee in-place, there are still significant savings to be made.
- End of The Intro Period: Obviously, the good times can’t last forever and your introductory rate will eventually end. The credit card company is hoping that you’re still carrying a large balance after the intro is over – and hopefully you’ve added even more! The key is to reduce your balance as much as possible before the intro period ends.
- High Penalty Rates: If you fail to pay the minimum monthly payment on your account, then the introductory rate goes away and the penalty rate kicks-in – often as high as 29.9%. Even if you can’t make a significant dent in your balance – DON’T BE LATE!
Playing the Old Switch-A-Roo
Some of the most savvy and organized consumers play the switching game – moving from one 0% APR credit card to another to eliminate debt and save on interest charges. Although this can lead to significant savings over time, it takes diligence and constant oversight. Not to mention that regular card switching can have a negative impact on your credit score. If you’re going to play this game, proceed with caution and be aware that your credit score may take a hit until you’ve accomplished your objectives. Purchase only what you need and pay down your balances as quickly as possible. You can’t play this game forever, so you’ll want to exit as quickly as possible to avoid too much damage to your credit, or even worse, a growing debt problem.
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