Financial Tips | Debt Management

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How to save money and reduce your debt with zero percent credit cards

When it comes down to it, a zero percent interest rate credit card can save you money as long as (1) the fees for owning the card do not amount to more money than would an interest rate; (2) you do not spend more on the card just because the interest rate is zero; and (3) the default interest rate on the credit card after the promotional period ends is not astronomically high.

First things first, think about this interest rate issue logically. If a credit card company does not charge interest, how does it make money? In lieu of interest, the credit card company may be charging some kind of annual fee and some other maintenance fees. If the fees cost more than the interest would, you are not saving any money. Additionally, if you have a low credit limit, the ratio of annual fee to credit limit may be higher than an interest rate. This, again, does not save you money and in fact, costs you money. Therefore, should you decide to utilize a zero percent credit card, make sure that you actually save money by using it.

The most common way a credit card will have a zero percent interest rate is in the form of an "introductory" rate. Basically, a credit card company will charge you zero interest for a set amount of time if you obtain their credit card and transfer a balance from one of your other cards.

Depending on the amount of your debt on your older car, it may be advantageous for you to transfer that balance to one of these zero interest, "introductory" rate credit cards. Many credit care companies will give you a zero percent interest rate for a set amount of time on these transfers. Therefore, should you transfer your balance, all of your monthly payments during this time will go towards paying your principal and thus, you debt will be paid sooner.

It is important to note that there are some disadvantages to this method. First, you have to open a new credit card and thus, instead of having one, as in our example above, you will have two. If this is the case, you cannot use the old card again because this would negate the purpose of transferring the balance. Additionally, you have to make sure that the interest rate of the new card is not higher than your old card. Remember, the zero percent interest rate does not last forever, and thus, should the new card have a higher interest rate, you will offset any savings that you have made while paying zero percent interest.

The point is, a zero percent interest credit card can save you money. However, should the costs of the new card offset any savings you get from transferring, you should think twice before doing so.