Warning: Not All 0% Interest Rates Are The Same

As consumers, there are certain words and phrases that automatically trigger a positive response in our brains. Advertising agents, Marketers and Sales Representatives  are all very aware of these triggers which is why you see them everywhere. Two of the most popular triggers are:

1. FREE

2. 0% INTEREST

I have already covered our obsession with FREE, which is caused by our risk-aversion, so I will not cover that in this article. Since our obsession with FREE and our attraction to 0% are psychologically similar, I will not tell you WHY we love NO INTEREST (isn’t it obvious??). Instead, I will tell you why ALL ZERO PERCENT INTEREST RATES ARE NOT THE SAME. They may look like very similar offers, but they can be extremely different. And although our brains tell us that FREE and ZERO PERCENT offers do not cost anything, it’s important to realize that there is usually going to be some cost. Typically, there is going to be some sort of *asterisk associated with the 0% being offered.

Instead of asking you to strain your eyes and squint at the fine print, I am going to tell you how the 0% offers vary and what you should look out for.

Not All 0% Interest Rates Are The Same

There are 3 different 0% offers that you have probably seen, either, in your mailbox, on a commercial or at a retailer’s store.

1. Credit Card Purchases – 0% for 12 Months

I receive AT LEAST 1 credit card offer each day. Rather than get annoyed by the wasted paper, I think of it as a compliment to my credit score. While I am flattered by these offers, I find them to be pointless. If you are using your credit card as a SPENDING TOOL and NOT a BORROWING TOOL, then the 0% interest rate is irrelevant. If you’re paying off the balance each month, you will never notice an interest rate.

This is the most straight-forward offer as there aren’t many hidden costs. It’s important to note, though, that the 0% (usually) only applies to purchases. If you need to take a cash-advance from your credit card, you will likely pay upwards of 24%. Cash advances are extremely costly. Also, once the introductory period ends, your interest rate will likely jump to double digits.

What to Watch Out For

*0% jumps to higher interest rate after introductory period

*0% does not apply to cash advances

2. Credit Card Balance Transfer – 0% For 18 Months

A lot of intelligent people think that they can open up a credit card, rack up a sizable balance, and then continually transfer the balance to another credit card once the introductory period ends. This way, they’re essentially receiving a 0% loan. Unfortunately, this is rarely the case. If you have racked up a balance on your credit card and you are paying interest, transferring the balance is not a bad thing. But, the 0% offer does not mean that the process has no cost.

For instance, check out http://www.cbonline.co.uk/personal/credit-cards/ (it’s a 0% balance transfer offer for 16 months). Both the zero percent and the longer period to pay down the balance is enticing. But, you should know that most credit card balance transfers have an additional fee. In most cases, the balance transfer fee will be 3-4% of the balance. If you’re paying off a credit card with an APR of 15%, it’s a deal. If you’re expecting no cost, not so much.

What to Watch Out For

*There is typically a charge of 3-4% for a balance transfer

3. Financing – 0% For 36 Months (PLEASE BE CAREFUL OF THIS)

I used to work at a division of a bank that provided financing to retailers. For instance, if someone purchase an engagement ring, a laptop, a new HVAC system, or a new furniture set – we would help them finance this purchase. Just about all of these financing offers had an APR of 0% for a period of 48-60 months. BUT….if you did NOT pay off the balance in the specified term, we would charge you for all of the back-interest.

What does that mean?

I witnessed a guy pay for an engagement ring. He forgot to make the last payment BEFORE the 60 months. Overnight, his balance increased by $3000 because all of the back-interest was tacked on. The finance company essentially charged him 18% interest dating back to the origination of the financing. I felt horrible for him. But, the asterisks were there.

Please be careful when financing furniture, laptops, etc. If you find yourself in this position, make sure you pay off the balance early.

What to Watch Out For

*Companies can charge back-interest if you do not pay off the balance in full by the specified date

Readers: Do you have any other examples of 0% not actually being 0%?