Credit cards have the potential to be incredibly useful tools or, if misused, the types of things that can quickly lead a person to financial trouble. One of the enticements that credit card companies use to lure in new customers is offering 0% cards. While the idea of a credit card with 0% interest may sound great, it is important to understand exactly how these cards work and how the credit card companies make money on them.
First of all, it’s important to keep in mind that these cards generally have different terms from one issuer to the next. Although it may be boring, it is important to read all of the terms and fine print in order to understand exactly what the actual cost for this type of credit card is going to be.
While most people understand that credit card issuers make money on the interest they charge for purchases, that is not the only way that these companies get money. Even a 0% interest credit card will make money for the issuing bank. Every time that a credit card is used, a processing fee is charged to the merchant by the bank that issued the card. The amount of the fee will vary quite a bit from one card to the next, but about 1% for each transaction is common. Because individuals who have a 0% interest credit card are likely to make larger purchases, the amount of money that the bank makes on each transaction can be quite significant. Fortunately, that processing fee is not paid by the purchaser.
As stated earlier, the terms will vary quite a bit from one card to the next, but it is absolutely crucial that a consumer understand that a 0% credit card doesn’t necessarily come with any guarantees that it will stay that way. In fact, most of these cards lose their 0% interest rate if the individual makes a payment late or goes over their spending limit. It’s also not uncommon to find the 0% interest rate expires after a set amount of time even if an individual makes all of their payments on time, never goes over their limit, and always pays the card off each month. In fact, most 0% credit cards offer that percentage rate as an introductory offer that expires after a few months or a year.
One of the most important things to keep in mind regarding 0% credit cards is the fact that once the interest rate goes up, it often rises to a level higher than other credit cards. This is one way in which credit card issuing companies make up for the money that they lost by offering such a low rate to begin with. Whether the interest rate goes up because it was only offered for limited amount of time or because an individual broke some rules regarding their credit card, a person should understand exactly what the interest rate is going to be once their 0% rate is no longer part of the equation.
When used responsibly, these types of cards can be quite valuable, but many people find themselves in trouble because they do not fully understand all the terms and conditions.