0% APR Credit Cards
The "Free Borrowing Trick"
There is a trick using 0% APR Credit Cards that can give you free borrowing. It doesn't always work, but this page describes what you do.
0% APR Credit Card Offers
Finance companies sometimes make introductory offers to entice you to switch to them. They offer you 0% APR Credit Cards as a "loss leader". That is, the introductory offer costs them money, but they do it because they hope to recoup that cost - and much more - from you in the future.
You can use such 0% APR Credit Card offers to give you free borrowing - but only if you know how the finance company plans to recover money from you, and you make sure they don't succeed!
How they recover money
The finance companies recover money from you in a number of ways. These include:
- Quoting "0%" rather than "0% APR".
There may not seem to be much of a difference, but there is. The former type of credit cards can cost you a lot more than the latter. Eg: the finance companies can get money from you by...
- Imposing hidden charges or penalties.
These might include things such as charges for going over credit limits, balance transfer fees, annual card fees, etc.. We can't provide you with a comprehensive list, because the card companies are always looking for new ways of recovering money. The key from your point of view is to read all the fine print, specifically looking for clauses that allow the finance company to levy a charge. Even when there are no extra charges, there will always be clauses...
- Limiting the time period for which you qualify for a low-or-no interest rate.
Once the initial free period is over, their standard interest rate comes into force. This is usually very high - typically around 20-25%. If you have not settled your balance, you will be hit by high interest charges. To avoid these charges, when you get to the end of the period, you need to settle the balance.
- Crediting all repayments against your free balance and not additional spending.
The best way to use a normal credit card is to settle your account in full at the end of the month. But with these offers, if you pay off all your spending during that month, the money will be credited against your free balance, and your spending account will remaining outstanding and accrue interest. To avoid this, you should not spend at all on the credit card to which you have transferred your balance: have a second credit card that you use for normal spending.
Avoiding hidden costs
When using this trick for free borrowing, you need to:
- Make sure you opt for a card that has quoted a zero Annual Percentage Rate
- Read the fine print, and make sure that you avoid all circumstances that enable the finance company to levy additional charges
- Find out when the free interest period ends, and plan to pay off the balance at that time.
- Don't use the card for normal spending - use a second card and pay off the balance of that card in full at the end of each month
The "Trick" to Free Borrowing
The "trick" is simply this:
When the free period on one 0% APR Credit Card comes to an end, you find a new one and transfer your balance to it.
This may not always work, because you can't guarantee that you will be able to find a 0% APR Credit Card. Also, the new card company sometimes places limits on the amount that can be transferred, which may be smaller than the amount outstanding on your existing card.
If you have no debt...
You can still take advantage of 0% APR Credit Cards by using the cheque that the finance company provides to deposit money in an interest-bearing account. When the free interest period is at an end, you simply repay the amount outstanding, and keep the interest for yourself.
If you are thinking of getting a 0% APR Credit Card, then stop - there are some pitfalls.
0% APR Credit Cards can:
- Lull you into a false sense of security, thinking that you have solved your financial problems when, in reality, you have simply postponed the day of reckoning
- Encourage you to spend, when you should be saving
- Make you think that your current spending level is OK, but you need to be making cutbacks
- Create an expensive problem for you in the future, when the normal interest rate kicks in
They can be useful, but...
Any financial decision needs to be supported by good financial planning. Before you make any decisions, you should produce a personal budget and/or cash flow forecast so that you are on top of your debt.