NEW YORK (MainStreet) —Heard about that guy who never paid for a single meal all his life? Well, you wouldn’t have, because I just made that up. There really is no such thing as a free lunch. And over the years, thanks to the constant flood of sales enticements that come accompanied with really small and fine print, I’ve come to distrust the word free.
So when 25-year-old Mike Camp told me he was getting offers for 0% APR credit cards, I couldn't hide my skepticism. “I’ve been using a secured credit card for over a year now, and I’ve been pretty responsible with it," he said. "Now I am constantly flooded with offers for regular credit cards with 0% APR." Camp has been a paying a $36 annual fee on his secured card in addition to having his $ 2,000 deposit locked in. So these offers do look tempting.
How 0% APR works
0% APR cards offer you an interest-free period on your credit card for a limited amount of time, usually for an introductory period of 12 or 15 months. During this period, typically you will not be charged interest on your purchases or balance transfers if you make the minimum payment each month. At the end of this period, the APR will go up to market rates.
Who usually benefits?
Credit cards with 0% introductory offers can often make sense to someone who either carries higher rate balances on another card or who might need a new card and doesn’t plan to pay the balances in full each month.
The most attractive prospects for regular credit cards that more often than not include intro rate offers are people who have been using a secured card responsibly for a year or more. And that’s probably how Camp got onto the mailing list.
So if there's no free lunch, what’s the catch? The first catch is obviously the time limit. 0% APR cards come with a fixed period offer and are not 0% forever. Camp’s 0% APR, for example, would last until August 2014. Secondly, if you got an offer, it does not necessarily mean you’ll get the card. Card companies are not obliged to grant the 0% APR card to everyone to whom they make the offer.
“Various banks have different underwriting policies and risk tolerances, but in general 0% introductory offers require good or excellent credit in order to qualify," Ben Woolsey, Director of Marketing & Consumer Research, CreditCards.com said. "Sometimes people with less than perfect credit get these offers in the mail but they typically involve shorter intro rate periods or higher long-term APRs compared to customers with better credit ratings.”
Moreover, he added that offers to people trying to build credit could involve faulty mailing list selection on the part of the issuer and might entail the applicant getting rejected once their credit report is reviewed.
The final catch lies in the APR itself. If you fail to pay at least the minimum payment by the due date each month, the introductory APR goes away and a high penalty interest rate kicks in on any outstanding balances. In Camp’s offer letter, this rate was set at 29.99% and worse still, once triggered, it would apply indefinitely. “The customer must change his or her behavior and pay on time for six consecutive months in order to get out of penalty pricing,” Woolsey explained. Even then, the APR will not go back to 0%. It will stay at current regular APR that would be assigned to someone with the same credit score.
Check the fine print
So while a 0% APR card may not be all that bad, it’s certainly not a one-size-fits-all kind of card. And like with all “special offers,” the fine print is much more of a must-read. In addition to some of the important points we mentioned, remember also to read about clauses like post-introductory period APR, APR on balance transfers, balance transfer fees, annual fees and the grace period. You don’t want to be caught napping on any of those clauses.
Because if our guy did get those free meals after all, but they were loaded with cheap fat and sugars, it would only hurt him in the long run.
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