You’ve probably been receiving them too.
I get enticing low-interest credit card offers all the time. I’d like to think it’s because of my excellent credit, but the truth is I’m not so special… all of us get them!
The offers I love and use the most are the “0%” offers. I get at least one each week. You know the drill: They pull you in by offering zero interest on your balance for a limited time.
While I don’t carry much credit card debt, every once in a while I’ll have a big balance and the reminder will land in my mailbox at the same time as a juicy 0% offer.
But not all 0% offers are equal – and right now, the offers are the worst I have seen since before the Great Recession. They’re still 0%, to be sure, but it’s the fine print that’s going to get you.
You might already know that banks make money from the spread between borrowing and lending. Credit card companies do the same thing, but since they lend to risky people, they demand a higher spread to offset the charge-offs from deadbeats and losses due to fraud.
Banks don’t really have that concern because they are more stringent about who they lend to – but right now, banks are in a hard place.
The spread between what they pay for money and how much they charge is shrinking as rates move lower, and analysts foresee even lower rates ahead. For that reason, banks are getting more aggressive and sneaky too.
Accompanying each 0% offer are three provisions… The first is how much you will be charged for each transfer. The second is the term of the loan. And the third – and trickiest – is the interest rate the loan will convert to after the 0% term is over.
The Trouble With Low-Interest Credit Cards
While I might be the bank’s or credit card company’s worst customer, here’s who they are hoping for: the guy or gal who will withdraw or transfer the maximum amount, make the minimum payment (because it’s zero interest), and then convert to the higher interest at the end of the term.
If that’s you, you’re going to pay through the nose for the privilege.
What I want you to pay the most attention to is the percentage they are charging FOR the transfer at the 0% offer.
In the past, those transfer rates have been between 0% and 2%. That was when rates were at zero. Lately, however, I have been getting offers with post-promotional period transfer rates of 4% to 5%.
Take a $10,000 loan, for example. At 0%, you’re paying the bank nothing for a 12-month transfer. At 5%, you are paying them 5% for that privilege.
What they are basically doing is hitting you up on the front end with a 5% fee and still calling it a “0% rate.” It’s bogus, and you shouldn’t fall for it.
What you can do, and what I do, is call the bank or credit card company and negotiate the transfer fee lower. It works some of the time, but not always. While you’re at it, also negotiate the ultimate rate that you will pay in the event you transfer the balance. That works more often than not, especially if your FICO (credit score) is above 750.
When it comes to transferring balances, the best rule of thumb is to pay less than 2% for the transfer and pay it off during the term of the “special 0% rate” offer. Make sure the low-interest credit card benefits you see applied to your account are as good as the ones you see on paper.