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The 0% Interest Trap

June 24, 2014


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4296685700_70066b1ab5_zSide Note: Today my Dear Debt letter is live at Melanie’s blog. Check it out!

I’m a pretty big fan of 0% interest promotions that are often offered by credit card companies. I know, I know, this is a bad thing to admit since I’m a PF/debt blogger but it’s true. I love 0% interest promotions! I’ve even utilized a few of them at different times, like for my furniture purchase and I have a jewelry card that puts everything on 6 month 0% interest automatically. I’m also proud to say that I’ve never fallen in their trap. I have ALWAYS paid them off in full on or before the terms of the 0% interest promotion expiration date.

Currently, I still have one 0% promotion to pay off. This is for some furniture I bought for my new house. The promo period expires in September and I’m on track to have it paid in full by then to avoid interest charges.

The trap of these 0% interest promotions is that not only does your balance accrue interest after the promotional period expires, you are also charged interest in arrears from the day that you made that purchase on credit. This can amount to several hundred dollars to even a thousand or two. Essentially, it does you absolutely no good to use these promotions if you don’t pay them in full before they expire, and often times the interest rate charged after the promo period is higher than if you had just put the purchase on a traditional credit card.

Here’s the second tricky part, when you get your first bill it has a minimum payment calculated for you on the bill. YOU SHOULD IGNORE THIS AMOUNT COMPLETELY! In my experience, the amount they calculate for you is not the amount you must pay in order to have it paid off during the promo period.

To avoid the minimum payment trap, I take the full purchase amount, for example $1,200, and divide by the number of months in the promo period, usually 24, 18, 12 etc. For this example we’ll say 12 months 0% interest. The bill may say you have to pay $60 each month. Well, if you do that your balance will NOT be paid off in the 12 month period. Instead, you take the purchase price $1,200, divided by the 0% promo period, 12 months, and now you know that you must actually pay at least $100/month to avoid interest charges.

But what about those credit card offers you get in the mail that offer 0% on balance transfers and/or on purchases for X number of months? Well, I plan on talking more about those soon, so stay tuned!

Have you ever been caught in the 0% interest trap?

Photo courtesy of: Victor Camilo

 

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28 responses to “The 0% Interest Trap

    1. Also, if it was only on new purchases, it wouldn’t do me much good since I’m trying my darndest to NOT make any new purchases on my card. I’m not always successful, but when I do make a purchase on my card it’s usually very small so wouldn’t save me much interest anyhow.

  1. I did this when I purchased my bed. I did the same calculation, too – it definitely wouldn’t have been paid off in time if I had followed their minimum payment. I made extra payments on it anyway and paid it off before the promo expired. It’s nice to have if you know you can handle the payments.

    1. Exactly! I’m not going to claim to never ever use credit again after my debts are gone, but I would like to remain debt free for the most part. I will probably buy a newer car at some point and take on a loan for that and I will probably still use 0% interest promos but I will continue to use them wisely, and again I won’t be doing any of this until my interest “earning” debts are gone first!

  2. 0% interest promotions can be HUGE money makers for retailers because so many people don’t pay it off by the end of the promotion. I’m glad you never made that mistake because 0% interest when used to your advantage can be a good deal. It is somewhat sad (and a little unethical in my mind) that the monthly payments they recommend will not actually pay off the amount owed in time. I imagine one reason so many people do end up paying significant interest fees is because they assume the monthly amount is calculated properly.

    1. I totally agree that it is at least somewhat unethical that the suggested “minimum” payments won’t pay off your balance in time for the promotion and it is unfortunate that people are often unaware of this. Something needs to be done about that, like a statement clearly saying that the minimum payments will not pay it off in time, in my opinion.

        1. This is on all of my “regular” cards that are not in a 0% promo period, but it can be a little hard to find that info on the 0% ones.

  3. I’ve never been caught in the trap, but then again, I don’t call it a trap…The terms are usually pretty clear for those who take the time to read them; and in all reality, those who don’t pay for people like me to have the ability to enjoy those promotions responsibly. Great post, thanks!

    1. That is a good point. It is usually stated, though in small print and it can be hard to find. It should be obvious that a $60/month payment will not pay off a balance over $1200 in 12 months, but then again people in general are not very smart, which is why we have ridiculous warning labels on lots of products.

  4. I have used a 0% promotion once or twice. I’ve learned though, that I’m just not disciplined enough to take advantage of these kinds of promotions.

    1. I have been so far, but as far as getting a credit card just for the 0% interest, I’m not sure if I can be disciplined in that or not. A benefit of the ones I’ve had is that the cards can only be used at the certain store (ie: can only be used at that chain of furniture stores).

  5. I hang my head in shame to say I was once victim of that, with my laptop. I bought it for $1200 (gaming laptop) 0% interest for 12mo. That was about 10 months before I actually started budgeting. By the time I had decided to get out of debt, I was too far behind to pay it all back and I was hit with a LOT of interest. I was very ticked off. Live and learn, but never again. I now pay all my cards in full, and ignore the min. payments.

    1. Good for you for being able to pay your cards in full each month! That is a great habit. I used to do this as well but then one month I said “just this once I won’t be XYZ expense came up” and then they started spiralling out of control.

  6. I currently have 0% on my CC#1 and I am planning to pay them off by the time the promotion is over. It just came in time when I started seriously budgeting.

    1. That’s great! I’m thinking about taking on a new CC just for the 0% interest (of course there’d be a balance transfer fee, but it’d still be cheaper than over 20% interest).

  7. I have bought furniture in the past with pay later promotions. They probably ended up on my line of credit for all I know. I wasn’t managing the money then. We do the 0% balance transfer with low rate interest now. Just need to keep it away from the time period when I need to renew my mortgage because I don’t want to have a high debt ratio at that time.

    Kayla – I know we talked in the past about doing a HELOC for your credit cards but you didn’t think you were eligible. But that is a good idea if you could take a 0% balance transfer card at low interest but be absolutely sure it will be paid off before the expiry of the low interest.

    1. I am truly thinking about applying for a new card with a 0% interest on balance transfers. I’ve been thinking about it all year and now that my credit score has gone up a few points, now might be a good time, especially since I’ll have a lot of payment money freed up in October that I can then apply toward my new 0% card to get it paid off before the rate goes up. I need to crunch some numbers to be sure how much money it will truly save me.

    1. So far, so good. But I’m still not sure if I want to go down the road of having a CC with a 0% interest promotion and do a balance transfer. I’m just not sure if I’d be able to pay it off in time and thus it wouldn’t save me much money. I guess I have some numbers to crunch.

  8. We purchased our new washer & dryer with a 0% interest deal last summer. Somehow the terms of the deal changed and they started charging us interest. I’m not sure exactly what happened because Mr. Tre spoke to them, but we ended up paying the full amount right away and fighting them to reverse the interest. It was a nightmare but I’m glad we had already saved the money for the purchase.

    1. Wow! I’m glad you had the money saved so you didn’t have to pay their crazy interest. I wonder how they changed the terms. It sounds fishy to me (on their part, not yours)!

  9. I love 0% offers. I’ve used them three or four times over the years. The one I remember the most is using a 12-month balance transfer offer when I’d racked up about $9000 on my open cards (long story). I did have to pay a fee to do the transfer but I paid off the card within the promotional period and saved a ton.

    I also just got a new cash-back card a few months ago, planning to make it my main credit card for a while; I got it because of the cash-back thing but a nice bonus was that came with 0% on purchases for 12 months, and since I then had a lot of expenses related to moving and travel, it’s nice that I can pay those off in a slightly more relaxed way over the next few months without worrying about interest.

    1. I am thinking about taking on a new CC soon to take advantage of a 0% promo on balance transfers. I just need to do a little figuring to see how much it will save me and if I can truly pay it off in time.

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