I was chatting with a friend the other week who mentioned he was thinking about getting a new credit card – one with a 0 percent APR on purchases for over a year – to finance a couple of home improvement projects he had coming up.
Pros of making purchases with 0 percent credit cards
Obviously, his thinking was “I’ll buy everything I need on the card and pay it off before the 0 percent APR runs out.”
Played right, the transaction wouldn’t cost him a dime. In fact, by investing the money he would’ve used to make these purchases, he will earn interest instead of paying it.
And, as some credit cards offer both a 0 percent teaser rate and a bonus for spending X amount on the card in the first few months, he might profit even more handsomely on the whole thing.
Cons of making purchases with 0 percent credit cards
Obviously, however, this strategy is not without risk.
There’s the chance he’ll have trouble making payments and actually not be able to pay the card off before the 0 percent period comes to an end, costing him interest.
There are also credit implications: applying for a new credit card and adding a balance to that card both may negatively impact your credit score. Finally, there’s simply the headache of carrying debt. Even at 0 percent, debt is debt – it’s no fun to owe someone money.
Are you in a position to use these cards?
Here’s my advice on getting a zero percent credit card to finance a big-ticket purchase like furniture, an appliance, or medical bills.
If you have no other credit card debt, a solid credit score, and several months of emergency savings: Go for it, there’s little downside.
If you have no other credit card debt but are trying to improve your credit score or you don’t have much or any cash saved in the bank, think twice.
Applying for new credit and then adding to your debt load will retard any progress you’re making on improving your credit. And if you don’t have a cushion of savings in the bank, taking on debt – even at 0 percent – is a risk that I don’t recommend. If unexpected expenses come up you’ll be stuck choosing between paying the expense or making the credit card payment.
Think carefully about what you use the card for
Personal finance is personal, so I’m not going to judge anyone who tells me they used a 0 percent credit card for a European vacation (after all, I tend to agree that if you have the opportunity to travel while you’re young, you should take it at almost any cost). That said, there are some things that may be better going into debt for than others.
You may hear people talk about “good debt” and “bad” debt. They’ll say “good” debt includes things like a mortgage or a student loan, whereas bad debt is credit card debt or an auto loan. But that distinction is overly simplistic.
First of all, I think debt can be all bad, but even so-called good debt has its downsides. For example, I have a mortgage on my home at a very competitive interest rate, which many people would say is perfectly acceptable debt, but it’s still a financial albatross that keeps me up at night.
Second, it’s easy to imagine how a mortgage could be bad debt if you overreached to buy a property, financed 100 percent of the purchase price, and took a higher interest rate because your credit wasn’t that great. At the same time, paying with a 0 percent APR credit card for a class that lands you a raise at work would be an awfully smart way to use debt.
So if you’re thinking about using a 0% APR credit card for a big purchase, think about what the purchase will be. Is it something that will improve yourself, your earning potential, or the value of your home? Is it a necessary purchase? For example, did your refrigerator die or do you just want a new fridge because you’re tired of the old one? If you can answer yes to the above, you can feel pretty good about using a 0% credit card as a tool for purchasing something interest-free. If not, you may want to reevaluate why you’re willing to make payments on something – even at 0 percent – that’s not entirely necessary.
Choosing a 0 percent APR credit card
You may want to pay attention to rewards or bonuses, but that should be secondary to how long you’ll need to repay the amount you borrow. The goal is to avoid being caught with a balance when the 0 percent APR runs out.
Three cards to consider for this purpose are the
- The Citi® Diamond Preferred® Card which offers a 0% APR on purchases for 18 months
- The Citi® Simplicity® Card which offers 0% for 18 months and no late fees
- The Citi® Dividend Platinum Select® Visa®. This card offers a 0% APR for 12 months but a $100 cash bonus after you spend $500 in the first three months.
What do you think? Have you ever used a 0 percent APR credit card to finance a big purchase? Would you? Why or why not?