Are 0% Apr Credit Cards A Magic Debt Solution?

0% APR credit cards are becoming extremely common in the world today, thanks to a growing problem with credit card debt and a growing awareness on the part of banks and credit card companies that people want to find a way out of their financial trouble. And 0 interest credit cards at first seem like an ideal way out. Imagine, no additional finance charges accumulating while paying down your existing balances… It’s almost too good to be true! And it is almost like magic–in the sense that magic is often an illusion.

This isn’t to imply that the credit card companies are being deceptive when offering 0% APR credit cards, because they aren’t. Their exact pricing policies are right there on the application pages to any 0% APR credit card, though many people just see the big zero and coast on through the application. But before making any financial agreement, especially an agreement to enter into what amounts to a borrower/lender agreement with a bank or corporation, it pays to stop and take a closer look at exactly what you’re agreeing to.

First of all, there’s the well-established fact that 0% APR is always an introductory rate, lasting anywhere from six to twelve months. Since the major way a credit card company makes money is through interest rates, it wouldn’t make much sense for the company to do anything else. At some point, they will have to charge you interest, even on a 0% APR credit card, which is no problem, as long as you know how much interest you’re getting, right?

But it’s still important to look deeper. Many credit card companies charge extremely high interest rates–18% and up–on even 0 interest credit cards, once the introductory period has expired. Often, there are variable interest rates to justify this: a fairly low rate (maybe 11% to 14%) for cardholders with the best credit rating, a medium rate (17% to 19%) for cardholders with still okay credit, and a standard rate (as high, in many cases, as 23%) for cardholders with average credit. Still higher is the default rate, which you enter if the credit card company decides, for whatever reason, that you’ve been making too many late payments or that you’ve become a bad credit risk. At this point, your interest rate shoots up to as many as twenty-four percentage points above the prime rate (8% as of June, 2006), leading to a default rate of a massive 32%.

So imagine this scenario. You’ve gotten into some difficulty with credit balances and you’re looking for a way to stabilize your finances before paying everything off. Say you’ve got $1,000 in your existing balances across several cards. You apply for a 0% APR card with a balance transfer option and consolidate all of your debt on the existing card (assuming there’s no fee for balance transfers.) So now you have a 0 interest credit card with twelve months to pay it off. For whatever reason, your expected financial windfalls don’t come through, or required purchases offset your balance payments and your balance remains constant at $1,000 after a year. Because you’ve got average credit, your APR starts at 22%, adding $220 to your balances the first month, and more thereafter. You miss some payments, bringing your APR up to almost 33%. At this point, a full third of your balances are being added on to your debts every month, and you may start looking around for still more 0% APR credit cards for salvation

With some sound financial prudence and a determination to pay off your balances within the introductory period, 0% APR credit cards can be valuable resource for getting out of debt. But make sure, when you’re trying to get out of debt, that you know what agreement you’re getting into first.

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