A credit card with a 0% introductory interest rate sounds like a dream to a lot of folks. And it can be, if you use it to your advantage. But it can also become your worst nightmare, if you don’t know the ins and outs of this kind of rate.
I know someone who bought a used car for her son and paid for it using a credit card that had a 0% introductory annual percentage rate (or APR). She paid it off within a year, basically ending up with an interest-free loan.
That’s the dream scenario. But if you aren’t careful, this dream can turn into a nightmare faster than you can imagine. Particular problem areas can trip you up, and it behooves you to know them.
Here are five common ways that cardholders get into trouble with a 0% offer:
1. Not Knowing When The 0% Rate Ends
You’ll find the details of the offer in the credit card agreement. A 0% intro offer generally lasts anywhere from six to 18 months.
If you’re planning to use this card for a big purchase like my friend did, note the time frame so you can pay it off before the intro period ends.
If you don’t pay off your balance, you’ll start paying interest at the “go-to rate.” The go-to rate is the purchase APR that you’ll pay when the intro rate ends. And this leads us into the next mistake.
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2. Not Being Aware Of The Go-To Rate
We all need a little incentive sometimes. If you stay keenly aware that your go-to rate is, say, 17.99%, you’ll feel pressure to have little to no balance when it’s time for the go-to rate to kick in.
Write something like, “You have two months until you pay 17.99% interest on your balance,” on a Post-it Note and stick it to your fridge. Or set up calendar reminders in Outlook or whatever desktop software you’re using. Just be sure you have a way to keep the go-to rate on the top of your mind.
3. Paying The Bill Late
You have to read the fine print so you know what might trigger a loss of the intro rate. Listen, if this happens, the go-to rate is applied to your balance. Plus, you could get a late payment fee.
A common trigger in credit card agreements is a late payment. So you simply must pay your credit card bill on time every month. If you’re having cash-flow issues and can’t consistently pay your monthly bills, you need to stay away from credit cards altogether until your situation improves.
If late payments are a chronic problem, you could even end up with a penalty rate, which is often around 30%. Set up email or text reminders so you never forget to pay your bill.
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4. Assuming Cash Advances Are Included
This is a very common mistake, and I can see how it could happen. You’ve got a credit card with a 0% intro APR on purchases — so it’s natural to assume the rate applies to all of your transactions.
But unless the credit card agreement states that cash advances are included in the 0% APR offer, assume they are not. This means that as soon as you get a cash advance, the interest starts ticking. And the interest is at your go-to rate.
With few exceptions, it’s not a good idea to get a cash advance anyway. Really, you can build up interest expense and debt in a hurry. Think twice before you swipe your card for some quick cash.
5. Buying Stuff You Don’t Need
Remember my friend who bought the used car? She needed a car anyway so this was her strategy to get an interest-free loan.
See, that’s the key. Don’t think of this as an opportunity to redecorate your home unless you had planned to do that anyway and you know you can pay it off before the go-to rate ends.
A good way to keep your spending in check is to track it. I often recommend free online money management tools, such as Mint. When it comes to spending, my biggest weakness is dining out. I have a “Restaurants” category and a limit for this expense set up on Mint. When I get close to my limit, I get an email telling me to start cooking. OK, it doesn’t really say that, but knowing that I’m close to my budgeted limit makes me start planning more meals at home.
The Investing Answer: When you get a credit card with a 0% intro offer, pay attention to the details. Read the credit card agreement carefully so you know how long the intro rate lasts and what your go-to rate is.