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The 0% Interest Trap

Written by , Posted in Money & Finances

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4296685700_70066b1ab5_zSide Note: Today my Dear Debt letter is live at Melanie’s blog. Check it out!

I’m a pretty big fan of 0% interest promotions that are often offered by credit card companies. I know, I know, this is a bad thing to admit since I’m a PF/debt blogger but it’s true. I love 0% interest promotions! I’ve even utilized a few of them at different times, like for my furniture purchase and I have a jewelry card that puts everything on 6 month 0% interest automatically. I’m also proud to say that I’ve never fallen in their trap. I have ALWAYS paid them off in full on or before the terms of the 0% interest promotion expiration date.

Currently, I still have one 0% promotion to pay off. This is for some furniture I bought for my new house. The promo period expires in September and I’m on track to have it paid in full by then to avoid interest charges.

The trap of these 0% interest promotions is that not only does your balance accrue interest after the promotional period expires, you are also charged interest in arrears from the day that you made that purchase on credit. This can amount to several hundred dollars to even a thousand or two. Essentially, it does you absolutely no good to use these promotions if you don’t pay them in full before they expire, and often times the interest rate charged after the promo period is higher than if you had just put the purchase on a traditional credit card.

Here’s the second tricky part, when you get your first bill it has a minimum payment calculated for you on the bill. YOU SHOULD IGNORE THIS AMOUNT COMPLETELY! In my experience, the amount they calculate for you is not the amount you must pay in order to have it paid off during the promo period.

To avoid the minimum payment trap, I take the full purchase amount, for example $1,200, and divide by the number of months in the promo period, usually 24, 18, 12 etc. For this example we’ll say 12 months 0% interest. The bill may say you have to pay $60 each month. Well, if you do that your balance will NOT be paid off in the 12 month period. Instead, you take the purchase price $1,200, divided by the 0% promo period, 12 months, and now you know that you must actually pay at least $100/month to avoid interest charges.

But what about those credit card offers you get in the mail that offer 0% on balance transfers and/or on purchases for X number of months? Well, I plan on talking more about those soon, so stay tuned!

Have you ever been caught in the 0% interest trap?

Photo courtesy of: Victor Camilo

 

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Kayla

Kayla is a mid-20s single girl living in the Midwest, USA. She is focused on paying off her consumer and student loans, while simplifying her life and closet. You can join her on her journey at ShoeaholicNoMore or follow her on Twitter.

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