The signs are everywhere, “O% Financing.” Car dealers, credit card companies, and retailers use the temptation of zero percent financing as an effective marketing tool to get consumers, like me and you, to buy. Why wouldn’t it be a success? It feels like free money. All you need to do is be able to afford the low monthly payments and you can have what you want today, at no extra cost to you. This marketing just simply adds a new twist to the “Buy today, pay tomorrow,” concept that is so popular.
The trick is that all 0% offers are not the same.
Car Company Financing use the 0% financing to bring in buyers. The catch is that very few consumers qualify for the zero percent offers because it requires stellar credit. For those who fall short, you will be steered to more profitable financing at market rate interest.
Credit Card Company Offers to new customers of 0% for 6 to 12 months is used as an enticement to sign up for the card. They win because over that “free interest” period you are likely to run up balances that will then be charged interest when the promotional period ends.
Retail Card Companies have a troubling trend with 0% offers that are really deferred interest. This means they charge you no interest for a few months (6 to 12 months is most common) and then if the bill is not paid in full, interest is charged on the full purchase price, back to the purchase date. When this happens you lose the promotional interest benefit.
Common places that “deferred interest” is found includes retail stores like Best Buy, Lowes, Staples, and Sears. Deferred interest generally requires monthly payments to be made, just as you would with traditional credit card purchases. If there is any promotional balance on the account when the promotional period ends, the deferred interest will be added to the account, and back dates to the purchase date.
It can be difficult to pay off promotional balances if other charges are made on the account at regular interest. The CARD Act stipulates that any payment over the minimum amount goes towards the highest interest rate. While the promotional purchase is in deferment, the rate is zero. This results in attempts to pay the balance down, going to higher interest purchases instead. This often leaves the consumer to pay the full balance in the last 30 days, in order to achieve payoff.
Deferred interest can benefit you if the card is only used to make promotional purchases. Then, ensure the balance is paid in full by the due date by dividing the purchase price with the number of months at the promotional rate. Make this your monthly payment. Note that promotional end dates do not always coordinate with the statement due date.
For those with excellent credit you may be able to take advantage of credit card 0% promotional rates through a balance transfer from balances on a higher interest card. Other higher debt will most likely be a priority for additional payments, leaving you to pay higher interest on the account when the promotional period ends. If the long term rate on the new card is lower than your current credit card debt, this could be an effective strategy.
All promotional or zero percent interest offers will come with fine print. Paying attention to the rules and following them exactly, may enable you to finance purchases inexpensively, and even pay down debt.
For more helpful information about reducing your debt, contact one of the specialists at Strategic Consulting today to receive a FREE debt analysis.