You come across an advertisement for a credit card offering 0% interest. You know that you will always pay the full amount due, so you have every reason to believe this is the perfect card for you. But have you wondered if the bank or other provider is making any profit from this offering, and if so, how?

There is a lot of competition in the credit card provider sector, and banks offer interest free credit card packages to retain customer loyalty. This interest free period is limited; by the end of its term, the person should pay up all debt and have a zero credit balance. The fine print is really very fine and many people do not read it before signing up for the credit card. If they default on even one payment, the credit card company charges an immediate fine, which is expected. In addition, they can straight away take off the 0% interest rate currently offered and levy a much higher rate, citing the reason of increased borrower risk. This is unfair to the borrower who should ideally be given an advance warning, so that they have a chance to close the debt before the increased rate is levied as penalty.

Lenders also make money on credit balance transfers. The borrower opts for balance transfer when their interest free period with the current credit card company is about to expire and they cannot clear off the entire debt; they start off with a new credit card company to avail of their initial 0% interest rate, giving themselves a few more months to clear outstanding dues. This transfer fee may look like a small percentage, say 1 to 2%, but it works out to a substantial amount on a larger credit balance. The borrower does not realize its magnitude as they are not asked to pay up the fee by cash upfront; it is simply added to their credit balance. Your Personal Financial Mentor can help you avoid these pitfalls.

The cash advance against your credit card looks very attractive but will incur a much higher interest rate; definitely not the 0% interest on your credit. Be particularly wary when you have multiple payments pending of different types; payments for credit card, cash advance and credit balance transfer, as an example. The credit providers usually tend to finish off the debts having 0% or lower interest rates and lower penalty fees first, so that they can make more money. To avoid all these credit card traps, make it a habit to take only as much credit as you can afford to pay back on time.

Categories: Credit Cards