0 percent on purchases (credit card question)?

pretty good question and the answer is tricky

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at one level, the offer means exactly what it says … until it expires, you pay no interest, exactly zero percent, on the PART of your total balance that was caused by purchases.

BUT:

1. Immediately after the freebie period ends, the then entire purchases balance begins accruing interest at the normal rate.

What usually happens is that a new user runs up a few hundred or thousand in zero rate balance and then when the offer ends can’t pay off in full. So you suddenly have a balance that is accruing interest at something like 30% per year [2 and 1/2 percent or 1/40th per month]. {Or whatever the then effective rate is.}

2. The way the bank applies payments is to the lowest rate balances first. It says so in the contract.

This means that all payments go to paying off the zero interest part of your balance and NONE toward paying off any other part. So, if you ever get anything that is considered a cash advance [and there are a long list of these now], that cash advance is assessed interest at 30% per year {or whatever the cash advance rate is — usually higher than the purchases rate} until AFTER the entire purchases balance is paid off.

Now, since people almost never stop buying more stuff on their card, the purchases balance NEVER pays off. Thus, you end up paying 30% interest on your cash advances FOREVER.

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Maybe pending Federal legislation will change this 2nd mechanism. Don’t bet on it though. The banks need profitable business to dig themselves out of the hole they’re in and they’re willing to lobby Congress furiously to accomplish that.

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So, the only way to effectively get ahead on these zero rate deals is to A) use the card ONLY for purchases as defined in the agreement, AND B) deposit the difference between the amount you buy and the amount you pay into a saving account so that when last bill comes before the deal ends you can PAY OFF the entire balance owed.

does this help?
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