When you see credit card offers touting no interest for a long time, sometimes as much as 18 months, it may not be clear how the companies make money. We’ll explain how credit card companies hope to profit from 0% APR credit cards and how you can make sure to use them to your advantage.
It’s a marketing tool
The credit card industry is packed with thousands of different options. There’s pressure on card issuers to constantly find ways to grab the attention of consumers and promote offers that will persuade you to sign up for their card instead of one from a competitor.
Credit card companies know that interest rates are important to consumers, especially those who often carry a balance. They run 0% introductory offers as a way to entice customers to sign up. These zero-interest periods don’t last forever, but if you need to make a large purchase or are carrying a large balance on a high-interest credit card, the issuers are hoping this 0% offer will be irresistible.
They hope you’ll stay
Once you accept the tempting 0% offer, it’s debatable who benefits more. The credit card company has you as a customer, but you can use their card interest-free for the duration of the introductory period, which could be well over a year. The true test for credit card issuers is whether you will keep using the card once the no-interest period ends. They hope the 0% interest offer will hook you, and because you’ll already be in the habit of using their card, you’ll continue swiping even once you have a regular interest rate.
Not only do credit card companies hope you’ll continue to use your card after the introductory period, but they prefer you carry a balance once the regular annual percentage rate (APR), which is likely at least in the double-digits, kicks in. Giving you a year or more of interest-free payments may have lost them money in the short-term, but if you carry a hefty balance once your introductory period ends, you’ll be paying significant interest. In other words, they’ll make their money back unless you default on the card and don’t repay what you owe. (Credit card companies also make money on transaction fees each time you use the card.)
How to make sure you profit
Using 0% interest credit cards to your advantage is simple: Don’t carry a balance once the introductory period ends. By all means, carry a balance during 0% window; that’s what it’s there for. It’s the perfect time to buy that nice appliance, book your vacation or make another purchase that you would like to take your time paying off without any interest. But as your introductory period nears its end, start paying down your balance. Once it’s over, try to pay your balance in full each month to avoid incurring interest fees.
If you plan to carry a balance after the promotional period, make sure you understand the true interest cost of that credit card. Consider the promotional APR and period, the ongoing APR and the length of time you plan to have the credit card. The NerdWallet credit card tool can help you determine this true interest cost to see if it’s really a good deal.
Another pointer: Do not pay your bill late during the introductory period. If you make even one late payment, some issuers will take away the 0% rate and replace it with a penalty rate close to 30%, skipping right over the regular APR.