Find out what happens to your credit card interest rate when the 0% p.a. introductory purchase period ends.
If you have a credit card that offers 0% p.a. interest on purchases, remember that this is for a limited period only. At the end of this period, any outstanding balance on your card starts attracting interest. This interest is typically higher than prevailing interest rates as lenders try to compensate for the initial attractive offering.
How do 0% interest purchase cards work?
With a card that offers 0% p.a. interest on purchases, you can make purchases and not pay any interest as long as you meet some requirements. The time period for this interest offer can vary from one credit card to another, with options typically varying from six to 12 months. If you wish to make the most of the interest-free period, it’s ideal that you pay off the entire balance before the period comes to a close. As soon as the 0% p.a. interest period ends, the account starts to attract interest.
Compare 0% Interest Purchase Cards
Bear in mind, however, that only the outstanding balance attracts interest, not the total amount of all your purchases. For example, if the total amount of your purchases during this period is $5,000 and your outstanding balance when the introductory interest period ends is $2,000, only the $2,000 attracts interest.
While the interest rate at the end of the 0% p.a. interest period reverts to a standard purchase rate, cash advances attract cash advance rates. It is important to remember that there is no interest-free period on cash advances.Back to top
The difference between the purchase rate and the cash advance rate
Just about every credit card involves two kinds of interest rates. The purchase rate refers to the interest you have to pay for purchases you make, while the cash advance rate applies if you use your credit card to withdraw cash. For example, you could use your card to make a purchase of $1,000 and also to withdraw $1,200 from an ATM. Both these amounts will, in all likelihood, attract different interest rates, and cash advance rates are typically higher than purchase rates.
Note: Low cash advance rate credit cards can be helpful when you urgently need cash and need to withdraw funds. learn more hereBack to top
What are the usual conditions that apply?
As with most promotions, such cards require that you adhere to certain conditions in order to take advantage of the interest-free period. If you fail to do so, the offer comes to a close and you have to pay the regular interest rate. Two common requirements include:
- Not exceeding your credit limit
- Making minimum monthly payments on time.
If even one payment is late the promotion can expire, so you should be particularly careful about getting your payments in on time.
- Expert Tip: Remember that when a card offers 0% p.a. interest on purchases, the offer is limited to purchases. As a result, if you use such a credit card to withdraw money (a cash advance), you end up paying a high cash advance rate.
How can I benefit from the interest savings? Stoozing and balance transfers:
When you are looking to save money, interest on your funds can be a key element. Here we look at stoozing and balance transfers
Stoozing refers to an act of borrowing money at 0% p.a. interest, placing the money in a high-interest bank account and making a profit owing to the interest earned. If you use a credit card that offers 0% interest on purchases intelligently, you can benefit by using this technique.
Consider the following example. You can afford to buy a high-end gadget by paying cash, but you elect to use a credit card to pay for it instead. The cash you intend to use to pay for the purchase can earn interest until the 0% p.a. interest period on the credit card comes to a close. All the money you make in the meantime, in the form of earned interest, is profit. This practice requires that you maintain discipline and that you keep setting money aside for every purchase you make.
Balance Transfer Offers
Credit card stoozing is not for is not for everyone, so another option is to take advantage of a balance transfer deal. Transferring an existing balance to another card can relieve the pressure of additional payments on interest charges. Ideally you would like to define your objective early, if the objective is to relieve you of the interest repayments so that you are able to repay more of your debts then an option may be a balance transfer.
When it comes to cards that offer 0% p.a. interest on purchases, they are most effective if you can manage to pay your balance off before the promotional period ends. If not, more the balance you can pay off before this point, the better. Limiting yourself to paying the minimum monthly amount is never a good idea. Given that a number of people successfully manage to clear their balances in the stipulated periods when using such cards, if you use your card smartly you can do as well.Back to top