If you ran up your credit-card bill charging holiday gifts, check your mailbox for a temporary bailout.
In the latest expansion of the zero-percent financing frenzy, some of the nation's biggest credit-card companies are offering a no-interest loan for as long as 15 months. The deals are geared toward people who transfer their balances from competing cards. But even for people who regularly pay off their bill in full, the offers amount to essentially free money that can be used to cover tuition bills, down payments and other major costs.
Citigroup Inc.'s Citibank is pushing a particularly generous deal on its AT&T Universal Card. Move your balance from your current card and you won't have to pay any interest until April 1, 2004. Bank One Corp., meanwhile, is pushing a card with no interest on transferred balances until the beginning of December. At MBNA Corp., the interest-free period lasts only until the end of September, but, unlike most banks, MBNA allows customers to get zero-percent cash advances, too.
Jon Rubin, a New York City filmmaker, used a zero-percent offer from Fleet to cover his expenses until he sold a new film to HBO and other networks. "That's a beautiful thing to see on a credit-card statement," he says.
Card companies have offered no-interest deals for a while, but the interest-free period has been shorter and fewer people have had access to the deals. Zero-percent offers rocketed to 52 percent of credit-card offers in the third quarter of 2002, from 14 percent of such enticements in the second quarter of 2001, according to Synovate, a market-research firm.
Ironically for a business that makes a lot of its money on people who carry big balances, banks are pitching these deals only to customers with histories of not paying bills late. Most deals include hefty fees and high interest rates for customers who are late making payments or exceed their credit limits. In addition, after the interest-free period is over, the interest rate typically climbs to about 10 percent or higher. Still, for disciplined customers, the offers can be year-long, interest-free loans.
Why are banks tripping over themselves to offer interest-free loans? The credit-card industry isn't growing as fast as it used to, and zero-percent offers are the latest tactic to steal customers from rival card companies. Outstanding bank-credit-card debt grew 16 percent from 1999 to 2000, but just 6.9 percent from 2000 to 2001, according to CardWeb.com, an industry information site. Estimates for 2002 still vary, but no one thinks the industry returned to the double-digit growth figures of days gone by.
Banks see the new offers as a way to spur growth with customers who have proven track records. The banks are betting that once they win a consumer's card business with a zero-percent deal, that they can turn around and pitch them other products down the road.
At the same time, banks have cut the interest rates they pay on savings and checking accounts, which makes it easier for them to afford to offer zero-percent loans. "The cost of money is so cheap these days that it really doesn't cost a bank that much" to make these kinds of offers, says Clark Crowdus, a card-industry consultant in San Francisco. "The risk of default on repayment from good customers is virtually nil."
Certainly, getting a more favorable interest rate on their card balance will be an attractive proposition to many people. The average American household carried a record $8,419 in total credit-card debt as of mid-2002, according to CardWeb.com. Just 40.3 percent of cardholders pay their bills in full each month.
But there are drawbacks. Before accepting the deals, you should read the fine print to see if the card company is going to charge a fee for paying off your old card and moving the balance to its new one. For example, a current Bank One offer levies a 3 percent fee on the amount of the transfer, though it is capped at $50. Some companies may waive the fee if you jawbone them sufficiently, but Bank One says it won't.
Cardholders also need to pay attention to whether the zero-percent deal will be good for new purchases in addition to balance transfers. Most aren't, though this option is becoming more common.
And while you can carry your balance at zero percent, interest will still tick away on new charges for most cards. Indeed, if you run up new charges, the bank usually will make you pay all your zero-percent balance before applying payments to new charges. "Don't use any of the new cards for purchases," warns Chris Atwood, a banker in Wilmington, Del., who has leftover debt from his college days sitting on two different cards but uses a third one for everyday spending. "They're not making any money on me," he says.
Finally, don't ever fail to pay the monthly minimum charge on time. One slip, and the card companies will likely pump up that zero-percent rate to 20 percent or higher. Even if you pay your credit-card bill on time, the card company can still raise your rate if it checks your credit report and finds you've been late paying other bills.
If you haven't received a zero-percent offer in the mail but would like to get one, it doesn't hurt to call the card companies and see what they'll give you. Then, before you move your balance, call your current card company to see if it will match the offer. "Just tell them that you have a mailbox full of these offers and ask what they can do for you," says Robert McKinley, chief executive of CardWeb.com. "If they feel like there's a real threat that you would leave, they may find some way to accommodate you."