Zero-Interest Credit Cards – How a Balance of a Few Dollars Can Cost You Hundreds of Dollars

Imagine if a complete stranger came up to you and offered you a $1000 loan, interest free, to spend on whatever you want, just so long as you pay it back within two years? You would be, to say the least, somewhat suspicious. And yet this is what dozens of retailers and credit card issuers are offering millions of people all over the world.  Zero-interest credit cards are a tempting offer, but like any deal that sounds too good to be true, this one usually is as well.

Let’s be blunt, credit card companies are in the business of making money, not giving it away. So if a credit card is offering a zero-interest credit card, you can be sure that there’s a catch somewhere that will require you to pay some form of fee or interest at some point. And this is most definitely true of zero-interest credit cards. In fact, far from offering consumers a relief from high interest rates and exorbitant fees, many people are beginning to discover that a zero-interest credit card is often a guaranteed route to a financial headache, if not outright disaster.

The basics of the zero-interest credit card are fairly straightforward: just like any other credit card, you have a certain credit limit, but with the one difference being that for an introductory period (which can range from six to twenty-four months) you pay absolutely no interest on your balance. After the introductory period ends, then interest rates are imposed and those who weren’t responsible enough to pay off their debts in time will have to begin paying interest. This certainly sounds fair, and even seems to reward those who are fiscally responsible, but the problem is these zero-interest credit cards are designed so that you will likely have a balance on your card by time that interest free period ends.

A common way of doing this is through reward points. Zero-interest credit cards often offer some of the most generous reward programs out there. But there’s a catch: you often have to spend a certain amount with your credit card in order to receive these great offers. This amount, for many people, typically requires they spend far more using their credit card than they usually would. This, in turn, causes a snowball effect: while each month you’re trying to reap the benefits of that reward program, your credit card balance is steadily rising faster than you can pay it down. Therefore, by the end of the introductory period, many people find themselves with a debt that they’re all of a sudden paying exorbitantly high interest rates on and all because they wanted to get more and more reward points.

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But let’s say you don’t let your credit card debt get completely out of control. In fact, since you got your zero-interest credit card you’ve only used it for one purchase: a new laptop that cost $1000. You’ve made regular, albeit small, payments on the balance, but after nearly two years, you forgot to keep track of when the introductory period ends, and the deadline passes and you still have a balance of $10, but now with an interest rate of 25%. This shouldn’t be so bad, right? It is, after all, only 25% on $10, which is only $2.50, right? Wrong. What many credit cards will fail to mention is that the interest on many zero-interest credit cards is retroactive. So even if your balance is only a few dollars when the interest kicks in, you’ll be paying the interest on those first big purchases you already made. So although you’ve brought that $1000 balance down to $10, missing the deadline by even just a week can mean you end up paying 25% interest not on $10, but on $1000. That’s $250 in interest overnight!

Suddenly, those 0% interest low fee credit card offers aren’t sounding so tempting. Unless you have an almost superhuman ability to resist mouth-watering reward offers and the patience to read through—and understand—everything in your credit card’s fine print, then there’s good reason to believe that that zero-interest credit card is going to cost you a lot more than you bargained for.

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