The Federal Reserve has raised interest rates by a lot over the past two years. So, the annual percentage rates on credit cards have also gone up. Nearly all credit card interest rates are tied to the prime rate, which has gone from 4% to 8% in a series of rate hikes that started in 2004. Because of this, the interest rates on credit cards have gone up by 30% or more. Since August 2006, the Federal Reserve has kept interest rates the same, and many economists think that the next step may be to lower rates. But the rates haven't gone down yet, and the interest rates on credit cards are still pretty high.
High interest rates have led to higher monthly bills for people who carry balances on their credit cards, and for many, the minimum payment has gone up a lot. The good news is that 0% credit cards are a better way to avoid high rates now than they were in the past. There are two main types of credit cards with 0% interest rates: those that offer 0% on balance transfers and those that offer 0% on purchases. The best credit cards have no interest on purchases and balance transfers. How much can you save with these credit cards? Let's look at the numbers.
Let's say you have $10,000 in your account. If you just pay the minimum each month, you will earn close to $2,000 in interest over the course of a year. This is because interest is added to the balance every day. With a balance transfer with no interest, you can save all of that money and also have more time to pay off your debt. When the 0% APR period ends, there is a chance that your interest rate will go down. If it doesn't, you can always move the balance to another 0% APR credit card. Also, if you make the minimum payment of $150 a month, your balance at the end of the year will be closer to $8,200 than to $12,000. That is a big change.
Now, if you're lucky enough to have no credit card debt, a 0% interest rate can help you avoid paying interest on new purchases and free up some cash in the short term. Want a new refrigerator? Need to get your car fixed? Want granite kitchen countertops? With a credit card with a 0% interest rate, you can put off paying for these costs for a year and take advantage of high interest rates. How? By putting the money that would have been taken out of your bank account into a high-yield savings account and using credit cards with rewards.
Let's say you're going to spend $10,000 over the next few months. Using a credit card with 0% interest and 1% cashback rewards, along with a high-yield savings account with a 4% interest rate, can put an extra $500 in your pocket over the course of a year.
Obviously, not everyone pays off their whole balance every month. With average credit card interest rates between 12% and 15%, carrying a $1000 balance each month can cost close to $150 a year. Saving $150 in interest payments isn't a lot of money, but it's enough for a nice dinner and a good bottle of wine.
No matter how you use your credit card, a card with 0% interest can help your short-term and long-term cash flow. In a time when interest rates are high, it's a no-brainer to choose a credit card with 0% interest when the alternative is to pay more than 12% in interest.
