The primary motive behind any business and credit cards are no exception, is to make profits. However, you may be surprised at times to find credit card companies offering cards at 0% interest, meaning they will not make any profit from those cards. So, what is the motive behind such cards? Well, it is still to make a profit. But with the market so saturated and customers unwilling to take up new cards, the companies have to devise tactics to attract new clients. The offer is so enticing to customers and may even benefit them, but they have to be keen on the details of the agreement. Otherwise, the arrangement may end up being disastrous to the consumers if they do not pay attention to the terms and conditions. The customers could ultimately be the ones who cover the profits forfeited by the card companies.
How the 0% interest cards work
It is common to find standard cards with 0% interest, although usually for a restricted time. Also, there are offers where you can buy something by paying a certain minimum amount, taking the item with you, and settling the full amount in 12 months or within the agreed-upon period at no interest. However, you must pay the whole amount within the agreed period (promotional period). If you fail to pay in full, you pay the interest on the entire amount borrowed (or the value of the item) during the promotion period—not on the outstanding balance at the expiry of the promotion. For example, if at the end of a 12 month 0% interest promotion you have a balance of $200, and the original amount was $1000, you will pay interest on the original figure of $1000 and not on the outstanding amount of $200.
Other credit cards charge low-interest rates—2% or even less—for extended periods, but this is only for balances transferred from card accounts. However, the low rates do not apply to the new expenditures incurred on the card, and this may confuse card users. Such cards come with the condition that the user must make certain minimum monthly payments to keep the low rates. If they miss even a single payment, they lose the benefit of the low promotional rate, and the interest is charged at the regular rate of about 20%.
The 0% card promotions (or the purchase arrangement) and the low-rate transfer promotions can help you save a good amount of money if you observe the terms while using them.
The risks of 0% interest cards
While 0% interest cards and purchase plans can help you save substantial amounts, they could also make you end up paying exorbitant interest amounts if you do not clear the amount within the agreed-upon period. You may also find yourself stuck with huge balances at the end of the period, whose interest rates will be high if you have not worked out how you will repay. Also, the interest rate that is applicable after the promotion period is typically higher, ranging between 20%-30%, and this will certainly raise your debt ratio. Balance transfer credit cards, which charge 0% or low-interest rates on the shifting of existing debts from other cards to them, and a small fee can put the consumer in the same trap.
Consumers could end up with a huge amount of debt, and at worst, they could default, thereby hurting their credit scores. You should avoid these risks, since an impressive credit rating is crucial for easy access to loans. Nevertheless, those with low credit scores can engage professionals to help them boost their scores using trade lines by visiting https://www.boostcredit101.com/. These experts can also give you more advice on improving your score.
How to avoid the 0% interest trap
It is vital to be responsible with credit cards and your debt; only then can you have the 0% or low-interest cards working for you—and not for the benefit of the card companies. You must ensure you pay the full amount during the promotional period if you took up a 0% interest card or entered into such a purchase plan. In the instances where you have a balance transfer card or a purchase arrangement, the best and most prudent thing is to work out in advance how much you will need to repay monthly. You can have a standing order where you set a direct debit from your account for the amounts each month. With such a plan, you will avoid missing payments or incurring late payment charges.
Additionally, it would be good to restrict the cards for repaying the debt. You could also remove the card from your wallet to minimize chances of running the card and piling huge balances. For cards with limits, you will also avoid penalties for overspending. Finally, reading the fine prints of the agreement and seeking any further information or clarification is very important to avoid violating the deal and ending up disadvantaged.