0% APR credit cards are becoming very common in the world today. This is because credit card debt is getting worse and banks and credit card companies are becoming more aware that people want to get out of financial trouble. And at first, credit cards with no interest seem like the perfect solution. Imagine not having to pay any more interest on your balances as you pay them down... Almost too good to be true! It's almost like magic, in the way that magic is often just a trick.
This doesn't mean that credit card companies are lying when they offer credit cards with 0% APR, because they're not. On the application pages for any credit card with 0% APR, you can see their exact pricing policies. However, many people just see the big "0" and breeze through the application. But before you sign any financial agreement, especially one that amounts to a borrower-lender agreement with a bank or company, you should stop and look more closely at what you're agreeing to.
First of all, everyone knows that a 0% APR is always an introductory rate that lasts between six and twelve months. Since interest rates are the main way credit card companies make money, it wouldn't make much sense for them to do anything else. Even if you have a credit card with 0% APR, they will have to charge you interest at some point. This is fine as long as you know how much interest you are getting, right?
But you still need to find out more. Once the introductory period is over, many credit card companies charge interest rates of 18% or more, even on 0% interest credit cards. Usually, this is because of variable interest rates: a fairly low rate (maybe 11–14%) for cardholders with the best credit, a medium rate (17–19%) for cardholders with good credit, and a standard rate (which can be as high as 23%) for cardholders with average credit. Still higher is the default rate, which you pay if the credit card company decides, for whatever reason, that you've been making too many late payments or that you've become a bad credit risk. At this point, your interest rate can go up to 24 percentage points above the prime rate, which was 8% in June 2006. This means that 32% of people will not pay back their loans.
So imagine this scenario. You're having trouble paying off your credit card balances, so you're looking for a way to get your finances back on track before you pay everything off. Let's say that you have $1,000 in balances on several cards. You apply for a card with a 0% APR and a balance transfer option, and then you put all of your debt on the card you already have (assuming there are no fees for balance transfers). So now you have a credit card with no interest and a year to pay it off. For whatever reason, you don't get the money you were expecting, or you have to spend more than you pay off, so your balance stays the same at $1,000 after a year. Since you have average credit, your APR starts at 22%, which adds $220 to your balances the first month and more each month after that. You are late on some payments, which brings your APR up to almost 33%. At this point, a third of your balances are being added to your debts every month, and you may start looking for more 0% APR credit cards to help you get out of debt.
With good money sense and the determination to pay off your balances during the introductory period, a credit card with 0% APR can help you get out of debt. But when you're trying to get out of debt, make sure you know what the deal is before you sign it.
