Finance Globe

U.S. financial and economic topics from several finance writers.
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Good Uses for a 0% Introductory Rate Credit Card

Who can resist the offer for an interest-free loan? If you are offered a new credit card with a zero-interest introductory period, it's a good thing to take advantage of.

The introductory period on most credit cards can last anywhere from 6 months to a year, or more. When the promotional period ends, the credit card's APR will go up; you should know what that rate will become to avoid any surprises.

It's important to read all the terms and conditions of your introductory offer; many cards charge a balance transfer fee of around 3%. Some cards only apply the intro rate to new purchases; cash advances may cost as much as 21%. Read all the fine print before you decide if the card offers something that you can use.

Once you understand the terms and conditions of the credit card's promotional offer, figure out how it will most benefit you. Here's a few options:

Transfer balances from high interest credit cards.
Even six months of interest-free time can save plenty. Take advantage of this offer by paying off as much as you can before the rate goes up. Making only the minimum payments will ensure that you are merely delaying interest payments, rather than saving interest payments.

Be cautious about transferring more than you can pay off during the promotional period if the new credit card's APR will become higher than your old card's current APR. You may end up paying more in interest if the increase will be dramatically higher than it was with the old card, especially if you drag it out by making only the minimum payments. Many consumers side-step this by switching to yet another introductory rate card, continuing the interest-free period, but be aware that you never know when credit card issuers will discontinue the zero-percent introductory offers.

Pay off your bank line-of-credit.
Lines-of-credit usually have a competitive rate when compared to a normal credit card rate, but nothing beats a zero-interest introductory offer. Bank lines-of-credit are usually revolving accounts, so even if you can't pay enough to eliminate your balance before the end of the promotional period, you can buy some interest free time while you knock down the balance as much as you can. Then, if your line-of-credit has a lower APR than what the credit card will become, pay back the remaining balance on the card with your line-of-credit before the end of the intro period.

Pay down your car loan.
Most car loans are installment loans, so you won't have the flexibility to pull money back out like a revolving account. You will be required to continue the monthly payments, even if you pay a lump sum to principal. This tactic works best if you owe an amount that you can afford to pay off in the amount of time of the introductory period.

Don't just multiply the dollar-amount of the payment by the number of payments left in the coupon book to figure out the amount owed; request a pay-off amount from the lender. Your out of pocket cost to pay off the auto loan may be considerably less, depending on the interest rate of the loan and how much of the balance remains.

In addition to the interest savings, paying off your car loan can save you money on insurance. Most lenders require full coverage, with low deductibles, on an auto they've financed. If you pay off your auto, even with a credit card, you will own the car and receive the title. This gives you the choice to raise your deductibles or even drop certain coverage, which can reduce your insurance bill. Consider both the interest and insurance savings to determine if it's a good use of your credit card's introductory rate.

Keep earning interest longer on your savings.
You may have been saving money for a fantastic vacation or a major purchase. Use the credit card's introductory period while your savings earn continue to earn interest. If you haven't planned on any major purchases in the near future, use your new interest-free credit card for everyday purchases, like gas and groceries.

Save the amount you charge to your credit card in an interest-earning account. You can save in a bank money market account, or a CD that matures before the introductory period is over. Don't charge more than you have saved, so you can pay the entire balance off before the card's rates go up.

Make only the minimum payment each month to keep more of your money in savings, earning interest. Then, pay off the entire balance, in full, before the end of the introductory period. This should only be done by those who have the discipline to not spend the savings before the credit card is paid off. "Stoozing," but simplified.

Pay your taxes.
You're savvy enough to take an interest-free loan from the IRS if you owe taxes to begin with. Most people who owe taxes are in the higher-income brackets, and many in the higher-income brackets also have the financial resources for investments.

You've already kept your money working for you longer by delaying your full tax payments. Delay your payment even longer while you leave your money in a better place, by using a 0% introductory rate credit card. The IRS does charge a "convenience fee" of 2.49% for using a credit card to pay taxes, but if you have investments earning more than that, this could be an option to consider. If your card also offers rewards, points, or miles, using your card for taxes is a qualifying charge to earn them.
The Balance Transferring Act
The Danger of a 0% Introductory Rate Credit Card
 

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Thursday, 21 November 2019

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