Beware of Zero-Interest Credit Cards and Loans That Are Like Scams

Sometimes what looks like a great deal—a zero-interest credit card!—has a way of turning into a years-long nightmare.

Credit card companies, which are actually banks, frequently offer creditworthy consumers zero-interest credit cards or zero-interest financing. The offers come in the regular mail to prospective customers all the time. It will announce loudly 0% for 12 months! Sounds great. After all, a zero-interest credit card is so much better than the typical 24% annual percentage rate on credit cards and loans.

The banks and creditors seem very accommodating. That’s what makes it hard to resist.

To many people, zero sounds like “nothing.” It’s as if the bank or credit card company is saying, “You owe us nothing extra for 12 months, and you can borrow as much as you want up to your credit limit.”

And it’s precisely what the lenders want you to think. While zero-interest credit offers seem like gracious and fantastic opportunities, you should start looking at them as a lure, bait on a hook, and like a scam.

At a Glance:

Here is what trouble can develop for you with zero-interest credit offers.

1. You use 50% of the credit line or even max it out and are stuck with debt.
2. You don’t pay off your balance before the zero-interest term expires.
3. When that happens, you are charged interest monthly, in addition to the minimum monthly payment you must now make.
4. If you make only the minimum monthly payment due, even occasionally, your actual balance gets paid down slowly.
5. If you miss a payment or fail to make the minimum payment due, the offer will be invalidated, and your rate will instantly increase to a high annual percentage rate (APR) of 24% to 35%.

Credit card offers can open the door to years of debt.

There are several compelling reasons why credit and debt counselors advise consumers to exercise caution when considering zero-interest offers. Of course, they’ll also warn us about credit cards and loans in general.  

The rule of thumb for credit counselors is this: “If you can’t afford to buy something in cash, you can’t afford to buy it .” Unfortunately, many American consumers don’t follow this advice too closely.

Credit card offers don’t come solely from banks. You’ll also see zero-interest credit offers from retailers like Best Buy, Home Depot, and Zales Jewelers. They’ll offer “no-interest financing” for 6 to 12 months.  Sometimes they’ll refer to the special financing as “six months same as cash.” Typically, if you don’t already have a credit account with the retailer, you’ll need to apply for a card and be approved.

Don’t be fooled—retail store credit accounts are offered and serviced by (you guessed it) major banks and credit card companies.

How zero-interest credit offers work is like a scam.            

If you need a new couch, a new computer, or maybe want to take a summer vacation, isn’t borrowing money at NO interest the way to go? What can go wrong? Plenty! Here’s what the credit card company hopes you’re thinking:

1. “I’m only going to borrow a few thousand dollars, and if I pay it back before 6 months, it won’t cost me a thing.”
2. “If I don’t get this credit card now, I won’t be able to take the vacation I need.”
3. “There’s a big sale going on, and I can get a new big-screen TV and save a few hundred dollars. I’ll come out ahead!”

With ideas like that in your head, it’s easy to say “yes” to that credit card offer. When the card arrives, you have a vision of the future that looks positive. Then real life stepped in.

The rosy outlook changed.

At first, you had planned to borrow only $1,000, but then a couple of unexpected emergencies arose (car repairs, unplanned travel expenses, and medical bills), and you’re glad you had the room on that credit card. You charged about $3,500 on your credit card.

You wanted to make a good-sized payment each month, but after the first few months, you realized you had six months to pay it off. You liked holding on to your extra cash for everyday expenses.

The credit card company, to your surprise, didn’t ask for a large payment each month. They were being fair and only asked for $40 or $50 as a minimum payment. And they weren’t charging you interest, like they promised. This feels like it’s working out.

But guess what: you’re doing exactly what the credit card company wants you to do. Because, as with most people (especially those new to credit cards), you’ve fallen into a trap.

When zero-interest credit offers go bad.

Here’s what your payments are going to look like. Say you started with a credit card with a zero-interest rate and a $5,000 limit. Over those six months, you borrowed $3,500 and made monthly payments of $50 ($300 total) interest-free. Here’s where you stand starting that seventh month, when the offer expired.*

• $3,263, total balance on the credit card.
• 24%, new APR (it could be even higher).
• $63 interest charge for the month.
• $95-$100 is the monthly minimum payment due.

Take a closer look at what the numbers reveal. Here’s why.

When zero-interest offers get worse.

Here’s what the future would look like on that card if you paid $100 a month.

• It would take 54 months (4.5 years) to pay off the card.
• You would have paid $2,076 in interest alone to the credit card company.
• You would have paid the credit card company a total of $5,276 over that time.

And it all started with an exciting sounding “0%” offer—one of many.

*Note: To do calculations based on interest rates, APR, and credit balances, use the credit card calculator at NerdWallet or the credit card payoff calculator at Bankrate.

Don’t fall for those zero-interest credit offers.

Before you accept any credit card special offer, remember the following:

• If you accept the offer, you’re borrowing money you must pay back. That’s not the same as having extra cash or free money.
• The credit card companies will NOT stop you from reaching the limit because that’s what they want you to do.
• You must make a minimum payment each month, and the credit card companies aren’t concerned about when you’ll pay it all back. The longer it takes me, the more money it means for them.

Learn more about protecting your finances.

To learn more about protecting your money and personal finances, visit the Learning Center at WhatIsMyIPAddress.com. You’ll find many informative, easy-to-read articles to help you protect what’s important to you.