Counselor corner: Zero Percent versus Deferred Interest Credit Cards

Flores single shot croppedGreenPath Counselor David Flores recently was asked about zero percent interest credit cards, how they work and how they are different from “deferred” credit cards.

“In any situation, a consumer must read all the fine print carefully and know specific information about the credit card terms,” said Flores.  “Before signing, you need to know length of the zero percent interest rate and what the interest rate will be after the introductory period.”

Flores listed some common questions that consumers should ask:

  1. What is the length of the 0% interest rate? Many 0% or “teaser” rates come with a very short life, usually 3-6 months. Once the 0% rate expires, the new rate is most likely going to be much higher.
  2. What is the rate after the 0% expires? Knowing what the actual rate is after the 0% expiration is key, because if you do not plan on paying off the account within the 0% rate time period, your entire balance will be impacted by the new higher rate. This will result in a much higher minimum payment.
  3. Is it a “deferred” interest card or a 0% interest card? Some card companies have “deferred” interest cards that may look like 0% cards but are not. Interest accrues on deferred interest cards, but you are not charged the interest if you pay off the balance in full by the 0% deadline.

    If you do not pay off the balance, the interest is capitalized onto your remaining balance so, in the end, you end up paying a high rate on a higher balance then you originally had.

  4. Short Term vs. Long Term: 0% interest cards can be great for short term purchases, when you intend on paying of the balance in a short period of time. On the other hand, making large purchases, which cannot be paid off quickly, can actually cost you more. For example, if you can use a credit card with a 15% interest rate (for the life of the card) or a 0% card that will increase to 29.99% in three months, it may actually be in your best interest to use the 15% card if you don’t plan on paying off the balance in three months.
  5. Know your minimum payment requirements: Minimum payment requirements on 0% cards are always low, which entices consumers to “only pay the minimum” and not make much of a dent in the outstanding principal. Therefore, when the rate goes up, the credit card companies are able to charge a higher interest on a bigger balance.
  6. Credit Score Impact: Most consumers tend to “max out” 0% cards very quickly. This action can impact credit scores, as a portion of your credit score is based on your debt ratios (how much credit you have in use/ how much credit you have available). High debt ratios can reduce your credit score.
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