Zero Percent Credit Cards And Your Debt Payments

Are You Sure They Will Decrease?

Zero percent credit cards can be a very useful tool when used as part of a larger debt relief plan (which should definitely include a thorough personal or family budget). However, some people get a rude awakening when they realize that switching to a 0% interest rate credit card doesn't necessarily mean that their monthly debt obligations will go down. In fact, sometimes switching to a credit card that offers 0% interest can actually double your monthly debt payments!

Here's the scoop.

Credit card companies aren't stupid. Or more correctly I should say that the people that run the credit card companies aren't stupid. They know that many people who apply for and take advantage of their 0% introductory credit card rates, do so to avoid paying high interest rates on their existing credit card debt. However, if this is all you are doing, ie. you are not making any new purchases with your new card, some card companies will "punish" you for this. (I put "punish" in quotations because the way they punish you can actually work to your advantage. I'll explain this in a bit.)

How The Credit Card Companies "Punish" You

If you read the terms and conditions of most zero percent credit cards, you may find a clause in there that reads something like this...

"Your minimum payment amount may be raised to a maximum rate of 4% of the new balance, if over 90% of that new balance is made up of special rate balance transfers."

Let's illustrate what this means by using an example.

We'll assume that you have $7,000 in credit card debt sitting on a credit card with an interest rate of 17%. Your minimum monthly payment for the coming month will be $140, or 2% of the outstanding balance. Now let's say you signed up for a new 0% introductory rate credit card and transfered over your balance. You have decided that you are finally going to start paying down your credit card debt and therefore commit to yourself not to use this card for any new purchases. Therefore, all of your payments will, for the length of the introductory rate, go towards paying off your debt. 100% of the balance on your new credit card ($7,000) is made up of your balance transfer. Quite obviously, this is more than the 90% you are allowed as per the terms and conditions. You receive your next month's statement and instead of a $140 payment being due, you now owe $280, or 4% of the balance.

All of a sudden your debt payments have doubled.

In the worst case scenario, you are completely surprised and cannot come up with the extra $140. You do not make the full payment and bam, your interest rate goes from 0%, to 29.99%! And you're still stuck paying 4% of the balance as a minimum payment. So next month you will likely owe more than $280.

Why This Is A Good Thing

Let me be clear. The above scenario is obviously not a good thing. What is a good thing (for you if you can afford it) is paying at least 4% of the balance each month. In fact, what would be even better is to continue to pay $280 every month going forward, not 4% of the declining balance. If you were to just you $280 for the next 12 months (assuming the 0% rate lasted 12 months), you would have paid off almost half of your credit card debt ($3,360 to be exact).

But don't stop there. Look for offers for other zero percent credit cards. Find another one with a 12 month no interest period, and shuffle your remaining balance over before the first offer expires. Continue to pay the $280 per month and voilà, after 12 more months you will be only...

one $280 payment away from being credit card debt free.


Remember, zero percent credit cards can be a great debt reduction tools. But just like any good tool, you have to understand exactly how it works in order to get the most out of it.