“No interest and no payments for an entire year!” This statement can stop people in their tracks when shopping and often times is the deciding factor on a particular purchase. But this statement can be a dangerous one if you aren’t careful. No interest = no worries, right? Not exactly.
I personally have taken advantage of quite a few 0% interest offers and benefited from them. I think that buying an item on credit with a long term 0% interest rate can be a good thing, if you do it right. I admit that I haven’t done it right each time, but from my mistakes I’ve learned a few things that can help you keep your 0% interest purchase truly worry free. Here are 5 rules that I’ve come up with that can help you do that.
Rule #1: Don’t charge anything to a credit card unless you currently have the money to pay for it. This is the first way to ensure that you don’t get burned by a 0% credit card offer. Don’t rely on future income to pay for your purchase because your future income is not guaranteed. You can have the most stable job in the world, but that doesn’t mean that you won’t have to shell out money for a car repair or unexpected hospital bill in the future, which could drain you of the money you were going to use to pay off that card. I made this mistake when I bought my first computer right out of college. It was only $400 and I got a 0% interest offer for 6 months. I figured I could pay $70 a month, even though I was on a pretty limited budget. Before the end of the promotional period, my roommate decided to move out with only a week’s notice, leaving me with a $725 rent payment the next month (instead of the $375 I was used to) and I ended up having to have root canal that same month, which cost me $500 out of pocket. And it was December and I had no money budgeted for Christmas gifts. Needless to say that the computer didn’t get paid off before the 0% ran out. I was able to transfer it to another 0% credit card, but it ended up taking me a year and a half to pay off a $400 computer. Had I actually had the money before I charged the computer, it wouldn’t have been a struggle.
I learned my mistake from that made sure that I had enough money in savings to cover a later 0% purchase. This happened to be $2000 on our Home Depot card for new doors and windows for our house. We had the money in savings to pay for it, but in this case, I neglected to follow Rule #2: Be sure to set aside the money you will use to pay off the card. I had the money in savings, but I didn’t do anything with that money once I made the purchase. We had 6 months to pay it off, so I just left the money in our savings account. Well I didn’t take that spent $2000 into account when I reviewed our savings account so I figured we had more in savings that we really did. Add to that the fact that my husband took a huge paycut for over 6 months during that time, which made paying off the card more of a scramble since I broke part of rule number one by relying on future income to pay for it. (I was also planning on getting a tax return that was the amount of the purchase, but somehow my math was way off and our refund didn’t come close to what we thought). We still technically had the money to pay for it, but part of that money had to come from our emergency savings. When I had to dip into our emergency savings to pay off this card, I realized that I had not budgeted properly.
I did learn from my mistake and when we bought a new TV on our Sears card, I took the amount that was due on the credit card out of my savings and purchased a 6 month CD with that money. That CD sat there and earned interest (this was when the interest rates were actually high) and when the time came for the CD to mature, I simply transferred the money back into my checking account and paid off the credit card. It was so nice knowing that I didn’t have try and come up with the money to pay for the bill when it arrived.
On our recent purchase of new appliances, instead of putting the money into a CD (since the CD interest rates are so low) I put that money into my high-interest online savings account and noted that on my budget so there is actually more money in my account than the number I see on my budget (that way I don’t think I have more than I do).
Rule #3: Set a reminder for yourself for when the no interest promotion ends. You can do this in a variety of ways, but the important matter is that you actually receive the reminder in a method that you will notice. You can put a note on your fridge, you can set a reminder in your cell phone or PDA, you can set up a reminder in your calendar at work — whatever will get the message to you reminding you to pay off that card on time. My preferred method of reminding myself is actually putting it in my budget for the month that it is due (see How Your Budget Can Help Your Memory).
When setting your reminder, be sure to follow Rule #4: Pay the card off earlier than the end of the promotion to eliminate the risk of a late payment and/or back charges. Credit card companies offer these interest free rates in hope that you will purchase something and forget to pay before the promotional period ends, because in that case, they will usually charge you back interest for the entire length of the promotion. So if you have a year of no interest and don’t pay the card off in full by the end of the 12 months, they will charge you all the interest you would have paid for that entire year if you didn’t receive the 0% offer. That means that just one forgetful consumer will make up for the other ones they don’t make money on.
Don’t be the consumer they make their money on. Give yourself AT LEAST a week before the due date when you pay off the card. If you can, pay it off a month early so there is NO chance of being late. Also, be sure to call or e-mail the company to find out exactly what the due date is. It could be 6 months from the purchase date, or 6 months from the statement date. Either way, you need to know so your payment isn’t late.
And last, but not least, Rule #5: Don’t touch the money until you pay off the card! When you charge any amount of money to a credit card, you need to mentally tell yourself that that money is already spent and is no longer yours. You may see it in your bank account, but you can’t touch it because you’ve already spent it. Just because you don’t have to pay any interest, doesn’t mean you don’t have to pay for it at all.
This will eliminate the shock of forking out so much money when it comes time to pay the bill. This shock should instead come at the time you make the purchase (and honestly probably shouldn’t be a shock at all) so that when you pay the bill, you’ve already mentally prepared to make that payment. Don’t borrow from that money either. It is already spend — don’t touch it!
A 0% interest offer from a credit card is a great way to earn some interest on your purchase amount by keeping that money in some kind of interest bearing account. However, if you don’t adhere to these 5 safety rules, you could end up costing yourself a lot more money in the end.
Image courtesy of Claudecf