Banks love to advertise credit cards with 0% introductory rates for purchases. And they really do deliver what they promise: you can buy loads of stuff and pay zero credit card interest on the resulting balance until the end of the introductory period. For example, the Citi Simplicity card has 21 months of no interest and the Chase Freedom Unlimited has 15 months.
Obviously, the banks don’t do this out of the goodness of their hearts, or because they like you. They do it in large part because they know that most people won’t pay off the balance at the end of the introductory rate period, and will therefore wind up paying outrageous credit card interest thereafter (often 15% plus), for a long time.
That’s not to say, however, that there are not ways to use these deals to your advantage.
You Have To Be Extremely Disciplined For This to Work
The worst thing you can do with a 0% APR introductory rate credit card is to max it out and not pay it off (i.e. just make the minimum payments). This is what the card companies hope you’ll do, since you’ll then have a huge balance to pay off at the end of the introductory 0% period, and will be forced to pay it off little by little, while paying interest that can easily be 15% or more.
The solution to this is to use the card to make your large purchases as soon as you get it, and then divide the balance over the remaining number of interest-free months, and pay it off in that time. For example, if you put $10,000 on the card and have 20 months of no credit card interest remaining, you have to pay $500 per month.
The other, (and less desirable) solution is to take out a separate loan at the end of the introductory rate period and pay off the card. Then, you pay off the new loan at a lower interest rate than the card issuer would give you. However, this is dangerous because, if you are maxed out on the card, your credit score may be affected, and you may have problems getting a low-interest loan.
So, the only way this really works well is if you have the discipline (and ability) to pay off the balance completely during the interest-free period. If you achieve that, you’ve gotten a free loan and come out ahead. If you don’t, you can fall into a dangerous debt spiral.
Have An Honest Conversation With Yourself Before Taking the Plunge
What I suggest is that, before getting one of these free loans, you honestly examine you finances and determine if you can really pay off the expected balance by the end of the interest-free period. If you can, get the card, buy what you need to buy, and then put the card in a drawer and don’t use it again until you’ve paid it off. Finally, put your payments on auto-pay, for whatever amount is necessary to pay it off in time.
0% introductory rate cards can be a great tool to get a free loan for large purchases. However, they are also very dangerous and require extraordinary discipline if you are not to wind up worse than when you started, with your credit maxed out and facing insane interest rates.
Tim Kim @ Tub of Cash says
Thanks for sharing! I personally don’t like to churn and/or play any games with CC’s. It can work, because I know people who do it well. But you’re right in that it requires discipline, and quite frankly, a lot of work. I think more work than the potential ROI.
The Rich Miser says
Hi Tim! Absolutely, I think it’s easier to fall into a debt spiral than to play the 0% interest game successfully. Like you say, some do it well, but they’re probably in the minority.