Credit Card Debt Down; Bye Bye 0% Intro APRs

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Shocking news today as Americans are actually reducing their credit card debt.     According to this report in the Washington Post, Americans are saving more and racking up less credit card debt.   According to the Post, “Revolving credit debt, mostly through credit cards with balances that are not paid off immediately, dropped by an annual rate of 13.1 percent in August to $899.4 billion, the Federal Reserve reported.”

No doubt, this behavior is a direct result of my constant pleadings to the readers of this blog to join the “dead beat” club, those who pay off their balance in full ever month rather than pay interest.    The article does point out that this kind of behavior could also be a reaction to the recession, as people become more cautious in their spending.   Either way, this is good news for the consumers who are paying less unnecessary interest.

0% Intro Rates Are Disappearing

Everyone is familiar with the 0% introductory APR offers.   Now, word comes from ABC News that these offers are on the way out.    I for one am happy to see this happen.

Let me explain.   The 0% APR never existed in the first place.    This was largely a gimmick designed to get people to transfer balances to new cards.    There where two parts to this trick.   The first part was the balance transfer fee.    This was 3%  of your balance and, as the article points out, this has increased to 4% or 5% at most banks.    So the banks got 3-5% added to your balance right from the start.    Then it gets better, for them that is.     Every charge you make after the balance transfer incurs all sorts of interest up until you pay off the balance with the 0% introductory rate.      The allocation of payments to the lowest interest rate balances first is one of the unfair practices that is being outlawed by the CARD act.     It is therefore, no surprise, that banks cannot sustain 0% APRs without that little trap, buried in the fine print.

The 0% offers are still out there, but the terms are shrinking from a year to six months or less.    There are still some situations where this might make sense.    I suppose if you had a high enough interest rate and you accepted a balance transfer, the 3% “fee” might be worth it.   For most people, it is just a way to shift your debt from one bank to another, giving you the appearance of a savings, but with little result.

Where 0% Financing Makes Sense

On the other hand, I often make purchases directly with merchants who offer 0% financing.  There is a local furniture store that I won’t haggle with me on the price, but they will offer very generous financing terms at 0% for a year or more.      Yes, I would gladly pay your $1000 next year for my dinning room table rather than $1000 now.   My theory is that the financing company actually offers the store free financing in the hope that the customer misses the final payment and gets assessed the penalty interest rate.    With electronic bill payment, I can schedule the pay off a year in advance and never have to worry about being late.    So far, the largest purchase I have ever made like this was on my hot tub.   I had over a year to pay off that several thousand dollar purchase.

The most important thing to remember when accepting 0% financing is that you must be able to budget your money in advance.   You have to be able to know that you will have the money on hand to pay off your purchase before the introductory rate expires.    As the bills explain, the interest accrued, but is merely deferred until after the introductory period.   Fail to pay it off in full by that time, and you will owe interest on the entire balance from day one.

It is not for everybody, but if you can pull it off, it is a nice offer when you find it.

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3 Responses to “Credit Card Debt Down; Bye Bye 0% Intro APRs”

  1. Credit Card Chaser Says:

    You make a very good distinction between the 0% offers that come direct from the credit card companies and carry all kinds of charges and the much better offers that come from department stores, furniture stores, etc. I used a 0% interest for a year offer from Mattress firm one year ago and just paid off the balance in full a few days ago right on the year mark. The thing to watch out for though is just to make sure that if you use one of those offers that you keep track of when the first payment is due and then make sure to comply with the terms of the agreement so that you don’t do something to forfeit the 0% offer.

  2. Credit Card Mosaic Says:

    “My theory is that the financing company actually offers the store free financing in the hope that the customer misses the final payment and gets assessed the penalty interest rate.”

    This is half the equation.

    In any store financing relationship there are two ways to make the economics work. Income from the consumer and income from the retailer.

    The issuing bank does not do this for free for the retailer. Almost all (there are VERY FEW exceptions) retailers that engage in this type of financing activity pay a fee to the issuing bank and/or have a loss-sharing relationship with the issuer. This fee is the equivalent of interchange on a regular credit card but is different from client-to-client depending on the economics of the relationship and how much risk the issuer or retailer want. It can be as little as enough to pay for processing if the retailer can float the loan and bear the risk or extremely high (higher then an average credit card rate) if the offer is rich and the retailer wants none of the risk.

    As you stated previously there is money to be made in the individual who does not pay off the purchase in time. However, the risk (net credit loss and corresponding loan loss reserve builds) are super high (well north of the 10% that’s being quoted for bank cards today) in these types of portfolios. This risk must be offset with a corresponding higher interest and fees once the offer terminates. So while, 25% may seem like a high rate – on a risk-adjusted basis it may be adequate or in the case right now in the economic environment not enough.

    In conclusion, there are two ways to make a retailer financing program work.
    1. Income from the consumer
    2. Income from the retailer

  3. Financial Samurai Says:

    Bummer I loved the 0% option. You don’t have to use it, but it’s good to know we have it!

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