My mailbox is stuffed with offers for "pre-approved" credit cards. Over the last few years, I've gotten used to the low "teaser rates, such as 2.9% for three months.
But lately there's something new in my mail -- credit card deals with zero percent interest. That's right -- absolutely NO interest. Even better, these offers aren't just for credit cards; no, they're also for cash advances or balance transfers, and zero percent interest lasts for nine to twelve months.
Wow! A free loan for a year. These are seemingly unbeatable deals, especially when I've got to pay printing bills and vendors and travel expenses. Should I give in to such temptation? Should you?
Of course, I recognize that banks offer these no/low interest plans expecting to be profitable. The fact that the prime rate -- the rate at which the Federal Reserve makes money available to banks -- is so low makes it possible for the banks to borrow money to lend to you very cheaply. But banks don't earn any money at zero-percent interest.
So what's the catch? Can I find a way to make these offers work? Here's how:
- Understand how you can use the money: Each offer I receive is different. Some are for cash advances, some for new purchases, some for balance transfers (switching a credit card balance from a different card to the new one). In almost every case, the low fees are only available for ONE use. I may get zero-percent on cash advances but still pay over 17% for balance transfers or new purchases. Make certain you match offers with how you plan to use the card.
- Negotiate fees: Some banks charge fees for balance transfers or cash advances. In many cases, you can call and get these fees waived. The bank doesn't make most of their money off the fees.
- Pay on time: Every single billing cycle. And please note, I said "billing cycle," and not "month." Some cards are due more frequently than once a month. With these no/low interest cards, in virtually every case, if you are late - even once - your entire balance shifts to a much, much higher interest rate. If you are not scrupulous about paying your bills on time, it's better to shop for a lower permanent rate rather than biting on a "teaser." Banks make their money off late payers.
- Do not exceed your credit limit: Likewise, most "teaser" rates expire the first time you go over your credit limit. Don't count on the bank to cut your credit off. If you're transferring big balances to a lower-interest card, don't use that credit card for anything else.
- Pay balances off in full when the teaser term is over: The banks know that many people will still have hefty balances by the time the low rate expires. This is where they start to really make money. Do you have a reasonable expectation of having the money to pay the balance by the time the teaser term is over?
- Read the fine print -- over and over: Remember, low interest rates apply only to certain uses on each card. The banks apply your payments to any outstanding balance any way they choose. In other words, if you pay the minimum each month, and have a 16% rate on purchases, and zero percent on cash advances, the banks will apply your payments to your cash advance balance, leaving your high-interest-bearing balances untouched, racking up finance charges.
- Don't expect miles: These teaser rates almost never apply to credit cards in which you earn frequent flyer miles or other bonus points. Does that matter to you?
So what's the bottom line? If you have short-term debts and certain future income -- in other words, a cash flow problem -- the no/low interest cash advance and balance transfer cards can be a great deal.
BUT you have to be very disciplined. Use each card only for the purpose that carries the no/low interest. Pay on time. Don't exceed your credit limit. Pay off the total balance by the time the teaser rate expires. Can you do all that? If so, take their free money. If not, resist temptation.
Copyright Rhonda Abrams, 2002
Rhonda Abrams writes the nation's most widely-read small business column and is the author of The Successful Business Organizer, Wear Clean Underwear, and The Successful Business Plan: Secrets & Strategies. To receive Rhonda's free business tips newsletter, register at www.RhondaOnline.com.