0% Credit Card Basics – 0% Purchase vs 0% Balance Transfer Credit Cards

by David@MoneyNing.com · 16 comments

When someone refers to a 0% credit card, it’s either a 0% balance transfer credit card or a 0% purchase card. Both credit cards offer special promotional rates; however, it is essential to understand the difference between the two so you don’t end up getting stuck with unexpected fees and interest charges.

0% Credit Card

Zero percent is a promotional rate offered by credit card companies to attract new customers. A card will generally never stay at 0% forever. If it did, it would be difficult for creditors to make money on you, since creditors typically earn by charging interest.

The low promotional rate generally lasts for a set period of time. It is common for a zero percent rate to last for six months, or nine months, or even up to one year. You should be aware that, as of November 2009, most credit card companies will apply payments to lower balances first. That means if you make a purchase or balance transfer at a 0% promotional rate and then make a purchase that is not covered under your special promotional deal, all payments you make will apply to the money owed at 0% until that balance is paid in full.

While you’re paying off that 0% balance, the other purchase at the higher interest rate will continue to accrue interest. Upcoming changes in credit card regulations laws may alter this principle, but it still must be kept in mind until those laws take effect.

You should also be aware that the terms and conditions of most credit cards specify that you can lose your promotional rate if you default on any of the terms of the agreement with the credit card company. This means if you are late or go over the limit, you can lose your promotional rate and the balance owed on the card can be charged interest at a higher rate.

Some creditors expand this clause to specify that you can lose your promotional rate if you default on any agreement you have with them, even if it is not for the specific card in question. Still others take this even further and will raise your rate if your credit score changes and/or you default or make late payments on credit cards with other companies. The legality of such sweeping clauses is still in question and also may change under new credit card regulations.

0% Balance Transfer Credit Cards

0% balance transfer cards offer you a promotional rate only on balances transferred from other cards. There re two ways you can do a balance transfer. First, you can have the credit card company actually transfer the balances by giving them your account number and other relevant information associated with the card you want to transfer the balance from. Another option is to have the creditor send you balance transfer checks. The checks will be addressed to you and are good for any amount up to your available credit limit. You can use those checks to pay the balance on any loan you want, or in fact to do almost anything you would like, since they can be deposited in your bank account.

Most credit card companies charge a fee for balance transfers. The fee ranges from one percent to even five percent of the balance transferred depending on the card. Usually, there is a minimum fee of $5 regardless of the size of the balance transferred. Some credit card companies capped the maximum fee at either $75 or $100, but in an economy where easy credit is more difficult to come by, most creditors do not cap this fee anymore.

If a credit card offers you a 0% balance transfer rate, you should only take advantage of this if you want to be able to pay off other higher interest rate balances, and if our interest savings will be worth the fee charged.
Any purchases you make on the account will be charged at the standard interest rate associated with the card.

Remember, as stated above, payments will be applied to the lower interest rate balance first- in this case, to the balance you transferred. So, if you make a standard purchase using a 0% balance transfer credit card, expect to continue accruing on that purchase until your entire balance transfer is paid off.

Note: Here’s more reasons on why you should look at 0% balance transfer credit cards, as well as some examples.

0% Purchase Credit Cards

0% purchase cards offer you a zero percent promotional interest rate on standard purchases. That means if you go to the store and make a purchase, you will pay 0% interest on that purchase for the term of the promotional rate.

Most 0% purchase cards offer you this special promotional rate only on select purchases. For example, store credit cards will offer you 0% financing on a purchase at their store. This is especially common for furniture stores, electronics stores and home improvement stores. However, there are some general-purpose credit cards that will offer you 0% on any purchase made within a given time frame. The duration of time that the purchase is charged at 0% is generally shorter than on a store-specific 0% financing card.

Make sure you understand the terms and conditions and know what happens if you do not pay off balances within the promotional period. Check to ensure that the creditor will not go back and charge you the interest that accrued during the promotional period if you don’t pay the card off in full. If the contract contains a clause allowing them to charge you back interest, this could end up costing you money if something unforeseen happens and you are unable to pay off your purchase in full during the introductory rate period.

Choosing a 0% Interest Credit Card

The best way to choose between a 0% balance transfer credit card and a 0% purchase credit card is to understand the difference between them and your needs. If you need to transfer a balance, the balance transfer card is your best option. Otherwise, the card offering the promotional rate on purchases may be the way to go, depending on the terms and conditions associated with the rate.

0% Balance Transfer Strategies – Saving Money and Improving Credit

Credit card debt can be beaten, but it takes a plan to make headway against the interest rates that keep boosting the balances higher and higher. One of the very successful ideas for saving significant amounts of interest money – while still paying down the credit card debt – is through the completion of a 0% balance transfer. This type of strategy makes it possible for the payments made by the consumer to actually affect some change in the balance, rather than being constantly applied to the interest charges. But what are the options and benefits for this type of financial strategy?

First off, there is the obvious step of using the balance transfer of high-interest credit cards to the zero interest rate, so that it can be paid off while saving money. This is a great idea. Some offers will include six months at zero percent interest, but others may be as long as a year. That is a golden opportunity to make progress removing credit card debt without paying interest. Balances will go down much quicker that way. Some customers will even move balances from one zero balance account to another, as the first one expires, to continue the trek toward freedom from consumer debt.

If timed correctly and approached with diligence, even a significant amount of debt can be paid off without interest charges over the months or even years… assuming additional 0% balance transfer offers can be found. Customers should be aware that there may be fees affiliated with the initial balance transfer, but these costs are relatively insignificant when compared with the interest saved over time.

One nice element to this strategy is that the credit card companies do not make it difficult to transfer the funds from a higher interest account to the new zero interest account. They will often even assist with the transfer themselves, so anxious are they to get the funds into their own accounts. The companies, of course, are hoping that the customers will not be diligent or disciplined enough to make a significant dent in the balances, because the interest rate will go up again at the end of the introductory zero percent rate. It is up to the consumer to make sure that they are able to remain aggressive in making those balances disappear.

There are other strategies to consider when dealing with the 0% balance transfer offers, as well. For example, keeping the credit card account from which the balance has been transferred open, rather than closing it immediately, can have longer-term beneficial effects on the credit rating. This is one reason to consider keeping these accounts open, even if the account will not be used immediately – or ever. Closing the account may keep the credit card company from reporting positive information about the customer to the credit bureaus. Taking every aspect of the 0% balance transfer option into account can make it a very positive transaction in many ways.

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{ read the comments below or add one }

  • Anna says:

    Hey there,
    This was a very thorough article – I was hoping to find some clarification on the following specific to balance transfers: Does is make any difference on one’s credit report/status/score if one does a balance transfer direct from creditor to creditor (the balance transfer offer card paying off your other card directly) VERSUS having them cut you the balance transfer checks to deposit in the bank and then pay down creditor? Does one “look” better/worse to my credit report 🙂 ? i am thinking it doesn’t matte since the credit limit isn’t changing, the cards will all stay open, and all that. But -was wondering. I’m about to move 13000.00 so figured it was worth asking!

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  • Benjamin Bankruptcy says:

    in Australia they’re about to legislate to have any payments go on the highest interest portion of a “balance transfer”

  • Marcia Acioli says:

    Couple years ago I made money transfer from 3 credit cards to another. By that time I understood that would be charged 3.9% for each amount transferred just one time on the first month. I didn’t know that it would be also charged finance charge for the money transferred every month until the end of the promotion date. Please tell me. Is it correct or not?

  • Dave says:

    Well the real 0% credit card is the debit card. All the other types are really just marketing spin to try nd attract new cutomers. With a debit card, the fact that you have a linked bank account is enough to make it worthwhile for the bank – rather than charge interest.

  • Sandra says:

    Thanks for the rundown on these 0% credit cards. Most people seem to talk about the 0% balance transfer type, why is that? Is 0% purchase credit cards just not as popular, or is it not as useful?

  • Jard says:

    Please help. I have $13K in credit card debt. The APR on my current card is 9.4%. I’m thinking of applying for the 0% balance transfer for 15 months at Citibank, but can only pay $400 a month. Considering that there is a 3% transfer fee, should I go for it? I’ll try to put in more money a month, but $400 is my budget for credit card payment. I just want to pay off my debt as fast as I can. Thanks.

    • MoneyNing says:

      At 9.4%, you won’t be able to pay off your credit card debt in 15 months. Therefore, it would seem like 9.4% per year at 15 months is more than 3% up front. That’s why you should transfer your balance to the Citibank card.

      I’m not sure which card you are looking at, but consider the Citi Platinum Select MasterCard card up top. Their 15 month 0% balance transfer credit card offer is the best in the industry right now.

  • Joshua says:

    The best way to take advantage is definitely to use a 0% purchase credit card to buy a big priced item (like a TV or something), and then once the intro period is over, transfer it to a 0% BT credit card.

    If they are both 12 months, it’s pretty much a two year loan which is REALLY nice. If you can time that with a 12 month no interest loan from the retailer too, then it’s like gold.

  • Billy Wong says:

    I never really look for a credit card with these perks but whenever the purchase benefit is available, I will take a look and use it, but only if I already want to buy something. Then I will just pay the minimum and get a interest free loan. It’s probably not much but free money is never a bad deal.

    The people that get into trouble are those that either forget to pay the minimum, don’t know that they need to, or don’t have to funds to pay it off after the intro promo period expires causing the rates to jack up to crazy levels.

    Avoid those three cases and you will be on your way to good times.

  • Charles says:

    I actually find that the 0% balance transfer credit card perk helps you reduce debt while the 0% purchase helps you increase your debt.

    They are both good if used wisely but one is more prone to abuse than others.

  • Tim says:

    Thank you for pointing out the difference. I always feel like everyone just groups them together like it’s the same thing, and it’s nice to see that someone would at least break them out for the sake of explanation.

  • Cedric says:

    I happen to love my 0% purchase credit card when the promo was still going on. I think it was like 6 months or something but I bought a giant TV with it and saved myself a few bucks. Of course, the interest rate was like 5% back then but hey, who’s counting?

  • Sandy says:

    Balance transfers I can understand, but those 0% purchase offers is not for me. When I get a card, I don’t want to rack up my debt just because I don’t have to pay interest because by doing that, I’m still spending more than I should.

    • Jesse89 says:

      I’ve used those 0% purchase offers before. It’s really nice when you are buying a TV anyway and then get a 1 year free loan. It may not make a difference to you, but it certainly does for me.

      • MoneyNing says:

        Both “perks” have its respective benefits. I don’t think one is better than the other but the main thing is not to use the no interest loan as an excuse to spend more, because it’s a tough road to get back to even.

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