Nothing to it: The secrets of zero percent credit card offers
Jelena Ewart found herself in New York City without money. Her new job, and its accompanying paycheck, wasn't going to start for a few months.
"Being the proud college graduate," Ewart says, "and feeling all financially independent and capable, I didn't ask my parents for help. Instead, I got a 0 percent credit card."
She bought a modest bed and wardrobe from Ikea. That was about it in her apartment.
"I was very disciplined about it," she says of her card use, "and I never carried a balance in my life after that one time with a credit card."
Ewart still spends a lot of time thinking about credit cards, however, as the credit card and banking manager for NerdWallet, a financial and consumer information website based in San Francisco.
Zero interest credit cards, particularly zero interest balance-transfer credit cards, are the rage now with banks that are offering the cards for longer and longer periods, some for as long as 18 months. Economic conditions and attempts to capture the best customers have credit card issuers in a battle that may be a good deal for some consumers — as long as they watch out for the "gotchas."
"So try walking into a bank and asking for a $5,000 loan for 0 percent," Ewart says. "They will laugh you out the door. So the deal credit card issuers are offering is pretty outstanding — as long as you can commit to paying it off before the promo is over and as long as you are responsible enough to not keep racking up debt and carrying it."
History of nothing
Low-interest introductory offers are not new. Ben Woolsey, president of CreditCardForum.com, a website that reviews credit cards, says such offers have been around for about 20 years. When Woolsey started in the credit card industry in the mid-1990s, he says, the interest rates were higher and so the introductory rates for credit cards were around 9.9 percent. The idea was to lure customers with a low rate, and the card issuers hoped to make back their money when the regular rate kicked in.
As time went on, the introductory rates kept falling — eventually hitting 0 percent about 10 years ago.
Then the recession jumped in.
As Greg McBride explains, credit card companies were hit particularly hard by the downturn. The debt was unsecured, and defaults were huge. "They tightened credit and only preferred to lend to the highest credit quality customers rather than lower credit quality customers," says McBride, chief financial analyst at Bankrate.com, a consumer financial services company based in North Palm Beach, Fla. "Even though the economy has improved, card issuers still do not have much of an appetite for credit risk."
What nothing looks like
Zero interest cards have many iterations. The best card would be one that did not charge any fees to transfer a balance from another card. Although Chase offers this with its Slate card, it is very rare. "Most card issuers charge a transaction fee, averaging around 3 percent, but it can be 4 or 5 percent," Woolsey says. "So do the math to make sure you save enough interest with the 0 percent offer to offset the fee."
In the past, he says, issuers capped transfer fees at $50, $75 or $100. Today, the fees are uncapped. A 3 percent fee for transferring $10,000 will cost an extra $300.
Some cards offer 0 percent interest for transferred debt but not for purchases. Others offer 0 percent on both transfers and new purchases. Some might have cash-back rewards on new purchases. It is also good to compare the base rates, the interest that will be charged on cards once the introductory period is over.
Andrew Schrage, editor of the Money Crashers financial website, says the cards are not without risk.
"One of the 'gotchas,’ ” Schrage says, "is that you might be subject to a penalty APR if you make just one payment late."
Who gets nothing
Before the recession, offers for 0 percent cards were extended to a wide variety of consumers. Now, the offers have narrowed.
"Unfortunately," says Ewart with NerdWallet, "they are not really catering to the folks who might stand to benefit the most from them."
Instead, the offers are going to people with the best credit scores.
Exwart explains credit card companies make the bulk of their money from interest and other fees. They want to attract people who will keep balances on their cards — even when the 0 percent offer period is over.
"Usually, if you carry a balance in the past," she says, "you will likely do so in the future. And since carrying a balance is the most profitable thing you could do for the banks as a credit card user, they are very interested in attracting exactly the kind of person who tends to carry a balance but also tends to have really good credit."
Odysseas Papadimitriou, CEO of CardHub, a personal finance website based in Washington, D.C., says people have a misconception that people with large balances on their cards have bad credit scores.
"If you have bad credit, there is no way you can rack up a big balance because no one will extend you credit," Papadimitriou says. "The people who carry balances are the people with good credit because they are the people who pay on time. The majority of the balances of outstanding credit card debt is in the hands of people with good or excellent credit."
Just because people have a good credit score, however, does not mean they are being financially responsible, Papadimitriou says.
"Credit scores are interesting," Papadimitriou says. "They are good until they are not. They are good, and then you miss a payment, and they go down the drain. Unfortunately, that is the problem with debt in general. Everything works out until the music stops."
Battling for nothing
Because the interest rate the Federal Reserve offers to banks is near zero, banks are able to offer the 0 percent interest periods with little risk, says Woolsey.
"It is essentially a way to lure people into taking a card," he says. "They'll take losses for a while and eventually make money on the interest on what balance is left over. In today's economy, they will break even right away."
After so much loss in the recession, the prospect of getting the best customers with little risk is creating a brisk climate of competition.
"Credit card issuers are still fighting tooth and nail among themselves to grow their market share with consumers that have very good credit quality and pose a minimal risk of default," says McBride with Bankrate.com.
Advice about nothing
If people are eligible for the offers, they can be a good deal, the experts say. But they also warn about using the 0 percent cards responsibly.
First, McBride says, do the math to make sure the transfer fee doesn't wipe out the advantage of the 0 percent offer.
"My advice to consumers," McBride says, "is to use the 0 percent offer period to make headway on the debt. Have a game plan to pay it off before it expires."
Papadimitriou says it isn't a good idea to plan to go from one 0 percent offer to another when the first expires. With a changing economy, the offers may not be available in 12 or 18 months.
The types of 0 percent offers have stabilized over the past six months, according to Papadimitriou. "They don't show any signs of getting any better," he says. "This is the time to take advantage of them because the offers may start deteriorating. When you see a stabilization after you had a rise for a while, you may now want to take advantage and not risk losing a really good deal."
All the experts agree that people should shop around and pay close attention to find the best card for their circumstances. Ewart, however, doesn't think the idea behind low introductory rate cards is going to go away.
"It's kind of the oldest trick in the retail book," she says. "You give a free sample, and you earn someone's loyalty for life. So I don't think these kinds of cards are going anywhere."