Getting bombarded with credit card offers is a daily occurrence for most of us. In an effort to stand out in a crowded market, many of the cards being hawked in mailings and targeted web advertisements feature limited-time interest rate promotions. Issuers hope that the chance to avoid paying interest for a period of time will bring in new business.
But the Consumer Financial Protection Bureau recently sent out a statement warning credit card issuers to be more clear in expressing the terms of these promotions. At the same time, the CFPB urged consumers to be careful if they choose to take advantage of one. So what exactly should you watch out for? Let’s dig in.
1. Billing due dates
One of the biggest mistakes you can make if you’re on an interest-rate promotion is making a late payment. If you transfer a balance to a card that charges 0% APR for a period of time, but then fail to make a monthly payment, your promotion could be canceled. This means you’d have to start paying interest on your balance right away.
To be on the safe side, set calendar reminders or opt into text or email alerts from your issuer so that you’ll be notified when a payment is due.
2. The end date of the promotion
Most 0% promotions last for only 6-12 months, but it’s not the issuer’s responsibility to notify you when the clock has run out. You’ll need to keep careful track of when your balance will start collecting interest, and it’s smart to make every effort to pay it off before that time. Otherwise, you might end up no better off than if you’d stuck with your original card in the first place.
From the CFPB’s press release:
“The Bureau believes some [credit card] companies’ marketing materials do not clearly disclose that consumers must pay off the promotional balance by their due date to avoid racking up unexpected interest charges. … For some consumers, these surprise charges can make the cost of transferring a balance more expensive than revolving the same balance on their existing card.”
3. The balance transfer APR versus the purchase APR
Did you know that your credit card charges more than one interest rate? That’s right: The rate you’re charged depends on how you’re using the card.
For example, many people sign on to 0% balance-transfer promotions because they want to move high-interest credit card debt onto a card that’s interest-free for a period of time. But just because a card’s balance transfer APR is 0% for several months doesn’t mean that its purchase APR is the same.
As the name suggests, purchase APR is the rate you’re charged on new purchases if you don’t pay them off by the due date. So even if you’re not paying interest on an old balance you’ve moved onto a card that’s featuring a promotional balance-transfer rate, you could still be racking up interest on additional items you buy with it.
To avoid a nasty surprise, be sure to read your card’s terms and conditions carefully, paying special attention to the balance transfer and purchase APRs.
4. Your credit utilization
If you need to make a big purchase that you don’t have the cash for, getting a credit card that offers 0% APR for several months on purchases might seem like just the ticket. But even if you’re careful to make all your payments on time and pay off the balance before interest starts accruing, you could end up with a damaged credit score as a result of taking advantage of the promotion.
Here’s why: 30% of your credit score is determined by amounts owed. This portion of your score is heavily influenced by your credit utilization ratio, which is the amount you owe on your cards relative to your total amount of available credit.
Ideally, you should never exceed a 30% credit utilization ratio on any of your cards, but it’s easy to blow right past that threshold with just one big swipe. For instance, if you score a 0% promotion on a card with a $5,000 limit and then purchase a new TV for $2,500, you’re already utilizing over 50% of that card’s available credit.
This goes to show that just because you can make a big purchase with a credit card while still avoiding interest doesn’t mean you should.
Finally, it’s important to remember that using a 0% promotion can result in fees. The most likely fee that you’ll encounter is the balance transfer fee, which is assessed by your new issuer when you move a balance onto its card.
Balance transfer fees are typically 3% of the total debt you’ve transferred to the new card. This can take a big bite out of the savings you’re seeing on interest, so be sure to factor it into your calculations before you decide to move forward. Also, consider applying for a card that charges no balance transfer fee – if you have great credit, this is probably your best bet to minimize costs.
Be careful image via Shutterstock.