WHAT IS Zero Percent
Zero percent refers to 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.
BREAKING DOWN Zero Percent
Zero percent interest rates are 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. These offers should be treated with caution, since interest rates revert to the usual levels for credit card and department store debt once the promotional period ends.
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.
For example, 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 percent. 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.
Implications of Zero Percent
Before you sign up for a zero percent offer it’s important to consider transaction fees ranging from one to three percent, which can be factored in with a zero percent offer. Additionally, the actual cost of financing could be hidden in the purchase price. Let’s say you are in the market for a high-end washer and 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 an implicit 10-percent interest rate. In some cases, zero percent offers from credit card issuers make sense, such as for investing or as an emergency line of credit, but if the offer is being taken to finance a lifestyle or go on a luxurious vacation, you might think again before using this deceptively cheap source of credit.