Take Advantage of Credit Cards at 0% and Avoid Traps
In business, and especially in the case of credit card companies, profitability is everything. However, we are often exposed to credit promotions such as 0% interest on credit card use. Companies promoting this will not make any profit since the interests charged are their main revenue source, so it is mostly a way for them to find new clients in a world where the market is almost saturated. Indeed, this kind of promotion, which seems to be very interesting for consumers, may in reality be disastrous for them if they do not pay attention to the details of the agreement. Unaware consumers could end up being the ones covering for the credit card company's losses in the end.
Standard credit cards with 0% interest for a limited time are common. We can also see this promotion when buying products with offers of no charged interest for the first 12 months. These cards can help someone save an important amount of money, but they normally insert a clause in the agreement stipulating that if the user doesn't pay the balance in total, at the end of the promotion, the interest charged will be on the entire amount borrowed during the promotion, and not only on the balance left at the end.
For example, if at the end of a 12 month promotion at 0% interest the client keeps a balance of $500.00, from an original amount of $6,000.00, he will have to pay the interest on the original amount of $6,000.00, and not just on the balance of $500.00!
In addition, the interest rate starting at the end of the promotion is generally higher than 20%, and could even reach 30% in certain cases, which can undoubtedly raise your debt ratio. Not only the client risks being stuck with a balance at a high interest rate at the end, if it is not paid in full during the promotion, but he can also be forced to pay the new, higher interest rate on the entire amount borrowed during the promotion period.
It is however possible to save on a 0% interest rate promotion, but you must bring your balance to zero before the promotion ends. If you don’t, you will become the target client the credit company is looking for in order to cover the loss of profit of the promotion.
There are other credit cards that offer very low interest rates, at 2% or less, and for a longer period, but only for a transferred balance coming from other accounts, and not for new purchases, which can confuse people. As well, this promotion contains the following condition: the user needs to maintain minimum monthly payments if he wants to keep the low rate. If the consumer skips a payment, the promotional rate disappears, and it will engage a regular rate of close to 20%. You must therefore always make sure to never skip a minimal payment and you will be able to pay your debt faster, by transferring your other accounts to the one with the lower interest rate.
But be careful, the absence of, or the low interest rates, can encourage the user to ultimately get even deeper in debt without realizing. As soon as the promotion ends, the user can be stuck with a bigger and more important balance, and at an interest rate far from the promotional, original, one. We cannot forget that we are dealing with a limited time promotion, and that this kind of free credit cannot last when dealing with a profit making business. However, it does provide an opportunity for consumers to pay less interest if the promotions are used correctly. The consumer always has to stay in the line of conduct that gives him the advantage, meaning paying the total balance before the end of the promotion, or maintaining the regular minimal payments that are due.
Try our calculator Paying Less With Credit Promotions >