DEFINITION of 'Zero Percent'

A promotional rate of interest used to entice consumers. Zero percent interest rates are often offered by credit card issuers and sometimes by sellers of big-ticket items like home appliances. The zero percent interest rate is generally only extended for a limited period of time, such as six months to a year, and may be restricted to consumers with good credit scores. Zero percent offers should be treated with caution, since interest rates revert to the usual levels for credit card and department store debt – which could range from the mid-teens to the high 20s – once the promotional period is over.

BREAKING DOWN 'Zero Percent'

Credit card issuers and stores that offer zero percent interest rates are banking on the fact that a substantial proportion of consumers who avail themselves of the offer will be unable to repay the debt once the promotional period is over. Such consumers are then faced with exorbitant interest charges on the outstanding debt, which enhances the profitability of such offers to the card issuer or store.

Let’s say you took a cash advance of $10,000 on a zero percent offer for six months, after which time the interest rate goes up to 20%. After six months, you have an outstanding balance of $9,000. The simple interest on this debt works out to $1,800 per year, or $150 per month. If you were to repay the outstanding amount of debt in equal installments over two years, the monthly payment would be about $458. This means you would end up paying interest charges of close to $2,000 over that two year period.

Before you sign up a zero percent offer, consider the following points –

  • Is the interest rate truly zero percent? Most credit card issuers charge a transaction fee or something similar that can range from 1% to 3% of the amount advanced under a zero percent offer. This cost has to be factored in when considering a zero percent offer.
  • Is the actual cost of financing hidden in the purchase price? Let’s say you are in the market for a high-end washer-dryer that is being offered for $2,200, with zero percent financing available. If the same product combination is being offered for $2,000 elsewhere, the zero percent offer actually looks like one with a 10% interest rate.
  • What will the funds taken under a zero percent offer be used for? In some cases, zero percent offers from credit card issuers make sense, such as for investing (in safe investments) or as an emergency line of credit. But if it is being taken to finance a lifestyle or go on a luxurious vacation, think again before using this deceptively cheap source of credit.
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