You’ve seen the promotions—buy something now and get 0% financing on your payments, meaning you pay no interest for a set period of time while you make regular payments. There are also credit cards that promise a 0% interest introductory rate. Zero-interest financing and zero-interest credit cards sound like a great deal—so what’s the catch?
Zero-interest financing and credit cards could be a good deal, but make sure you carefully read the contract, know all the hidden terms, and can promptly pay off the loan. Otherwise, you may end up paying much more than you think for zero-interest financing.
Here are some common pitfalls and tips about zero-interest financing offers and credit cards:
- Not everyone will qualify. A company may advertise a 0% rate in big letters but then say in the fine print that only “qualified” customers can get that rate. Often, qualifying for zero-interest financing or credit cards requires you to have an almost perfect credit history.
- The 0% rate may come with restrictions. For example, you may be required to make a large down payment to get the 0% rate. Sometimes, the 0% rate is limited to certain items or models. Some stores may make you sign up for and use that store’s credit card to get the 0% rate. For cars, you may have to pay the sticker price (commonly known as the “MSRP”) to get the 0% rate. The sticker price may be thousands of dollars more than the price you could have gotten if you had been allowed to negotiate a lower price.
- The 0% offer may just be an introductory rate, with a very high interest rate kicking in after that introductory period. For example, you could end up paying a 21% rate after just six months of a 0% rate.
- You may be required to repay the loan over a short period of time, which means that the scheduled payments you have to make may be higher than you can afford.
- If you don’t make your scheduled payments on time, you could lose the 0% interest rate and be charged high fees and back-interest, meaning you have to retroactively pay a high interest rate starting from the date you bought the item.
If you are thinking about getting zero-percent financing or a zero-interest credit card, here are some tips:
- Make sure you understand all the terms before agree to a zero-interest offer. What is the interest rate if you don’t make a scheduled payment on time, or if you don’t pay off the balance within the zero-interest period? What late fees and other fees would apply? (Companies often try to make up for a 0% rate by charging high fees.) Read the terms of the agreement slowly and carefully, and ask questions if you don’t understand something.
- Do your homework. Compare the terms and total costs of a zero-interest offer to other options. Make sure you’re getting the best deal after factoring in all terms—sometimes, an option that charges more than 0% interest may end up being cheaper. For example, calculate the fees and interest that would apply if you think you might not be able to make all scheduled payments on time or pay off the balance within the zero-interest time period. A different option that charges interest but has lower fees may end up being cheaper.
- Make all scheduled payments on time. For zero-interest credit cards, pay off the full balance each month, if possible, or pay off as much as you can. Remember, you may be charged fees and other penalties if you don’t pay on time, and depending on the terms you could even lose the 0% interest rate.
- Don’t buy more than you can afford. It’s easy to buy things when you don’t have to pay the whole price right away and won’t get charged any interest for a few months, but it’s also easy to fall into debt that way. Wait to buy things until you’ve saved enough money to cover all—or most—of the cost.
For more information on credit card offers and terms, see Credit Card Offers—Common Traps.