How do the "0% credit cards" work? There has to be a catch?

I have a friend who has been bitten by the spending bug. He just established a credit record when he bought a home a few years back. Someone told him he "needed" a credit card just in case. He got the card and made a few purchases for the home which he paid back in a timely manner. Gee, credit cards are great! He decided to get a couple more. He then started getting zero percent offers and over the past two years has been buying stuff at an alarming rate. I was talking to him about debt and he said " I can make the minimum payments on my cards". He also believes he will always have access to new zero percent cards to transfer the balances to.
How do these lenders make money? What will likely happen to this friend of mine? There has to be some kind of way these companies "get" you. Any ideas?

It always goes up after a few months.

The zero percent is for a limited time only. Then, depending upon payment history, average balance carred, and overall credit scores, a rate will be assigned.

I'm on the BoD of a small community bank. We had this discussion many times. We never offered a zero percent, because, frankly the only way to recoup the start-up costs for every account, and the processing fees for determining the ultimate rate is to have everyone run up huge balances.

We opted instead for a tiered Gold and Platinum plan that allows the rate to be set as prime+. People never get misled, and the always know their rate. High C score people get lowest rates, medium C scores get middle rates, and so on.

It was easier for our accounants, credit officers, and the consumer.

The zero percent thing is a one month loss leader to get the interest on the back end.
The Professor

It's pretty simply, really. Five years from now it will probably over 25%.

NB:
Do him a favor, don't lend him a nickle.

He is the type you can't get through to. I hate to see it happen but he doesn't listen. BTW- I am not a bank (my favorite reply when asked for a loan)

without telling you-happened to my friend

It was guaranteed at 0% for 6 months, so I transfered a balance there.then 5 months and 2 weeks later I paid it off and canceled the account.

I think if I had waited 2 more weeks, the interest rate would have been about 19%. If you take one of these deals, keep an eye on the calendar.

The "credit card hop."

We started off with over $30,000 worth of debt when we got married. We've taken all our cards, and done this with them for the last 5 years.

I couldn't tell you how much interest reprehensor has saved us. But he watches them like a hawk. Right before one gets ready to expire, he transfers it to another 0%.

We have finally become the masters of our finances instead of the other way around!

btw: Thanks honey! :hi:
FSC

He'll have to declare bankruptcy.

He apparently doesn't have the first idea of how to use credit wisely.

You are correct about his credit knowledge. He is an alcoholic who has (thankfully) been clean and sober for 5 years now. I suspect he has replaced his urge to drink with an urge to spend.

Those companies collect on both ends. Furthermore, they typically prohibit (or 'disincentivize') the merchants from offering a "2.5% discount for cash" as a way of creating a tiered-pricing that clearly exposes this "tax" just like other transaction taxes.

Amex and Visa are only 2%. As a bank, we get 2/3rds of that, and the transaction side (the credit card companies) get the other 3rd.

MC is 2.2%. Discover is at 2.5% Diners' Club is almost 3%.

Also, there's an upper limit that most vendors sign on to. It's 2 %, but only to some set upper price. After that, the credit card people stop making money.

After 12 years on the board of a small bank, i know more about this stuff than i ever wanted to.
The Professor

I also thought Visa/MC were about at parity. I knew Diners' was higher (as was Carte Blanche), but I tend to mentally separate T&E from Bankcards. Doesn't the split between the bank and the CCCo vary? I thought that was variable. I also thought the consortium banks took a smaller split on the front end due to their back-end equity appreciation.

So, if you transfer $1,000.00, it immediately costs you $30.00 - it's not free money.

So, they get a card in your hands; you transfer your existing balance. You're okay until you use the card to buy something. Now, that purchase is on the standard rate. But your payments go first towards the balance transfers, and the interest keeps growing on that purchase.

If you miss a payment, are a few days late, or mistakenly send an amount that is even by one penny LESS than the required minimum, your entire balance will revert to the standard rate. End of 'free ride' (like it ever was one.)

Your "I can make the minimum payments on my cards" friend is the credit card company's ideal victim: the minimum payments are skewed to drag the financing of even the smallest item out into something like a 30-year mortgage. If all he does is make minimum payments, he isn't ever going to get out of debt, and he'll have paid over and over again for that CD or sweater he bought 10 years ago.

And no, he won't always have access to 0% financing. If you want to wake him up, ask him what his total credit card balances are, then plug them into a loan calculator (there are plenty of them online) to see what he'd have to pay over three years to wipe it out. It might wake him up.

Thhey are ususally 6 months or so. If you keep transferring the balance before the interest rate goes up, and always make your payments on time, it can be a good wy to save on interest, but it's crucial to start paying down the principal NOW. Waiting a year or two, until the rates all start going up (and there may no longer be 0% balance transfers available) could be a painful proposition. Your friend would be forced to get a HELOC or get into a Debt Management Program to get out.

I know because I'm in this boat. I have 15K in student loan debt AND 18K in credit card debt. It's mostly on low interest cards, and I've cut them up, but it's a long way to go before they'll be paid off. And it would be MUCH longer if I only paid the minimum.

The 0% hook is just an introductory rate that will balloon upwards once the intro period is over. It may be possible to keep transferring debt to new cards, but that trick will only work for so long. Thing is, your friend is ruining their credit rating by opening up multiple new accounts. It will hit them particularly hard when they try to finance a vehicle or refinance or sell their home. Opening new accounts is a big red flag to the credit scoring companies, who (correctly in this case) interpret that as someone who is overstretching their credit. Eventually those 0% offers will stop coming in as the credit rating drops and companies no longer want to take the risk.

Bad times ahead for this person, methinks. Credit used wisely can open up many doors. Credit used badly can follow a person for many, many years.

program on the history of the credit card. I imagine it is available on pbs.org, it explains all the tricks and how evil these bastards are.
Your friend may be at zero now, but one late payment or other mark against his credit record legit or not they'll drop the hammer and he'll be struggling at 30%.
Just making minimum payment is foolish, he'll never repay the principle just the interest on the interest forever and forever amen.
In justa few months the credit companies are going to control a large ammount of the American population, when this bk bill goes into effect, if you're in debt it'll be best to get out now or kiss your ass goodbye, because it'll belong to the credit cos then.

Great minds think alike:evilgrin:

So when you think you have a month to repay or pay a minimum amount its much shorter. So, even if the "offer" was 0% originally, it will quickly be raised to 9% or more, then be late again, up to 19%, late again, 29%, late again some even go up to 35% to 39%. Plus, my "Late Payment Fee" is up to $29.

They don't make money on GOOD customers, who those inside the Credit Card industry call "Dead Beats," They make their money off the Average and Bad customers.

You should show your friend the PBS - Frontline Program "Secret History of the Credit Card" at:

<http://www.pbs.org/wgbh/pages/frontline/shows/credit/>

It can be streamed on-line and the transcript is available at the above link. The link for Frontline is: <http://www.pbs.org/wgbh/pages/frontline/>

Yup, I used one of their checks that said no interest for 6 months and was good to use before say March. It was a necessity for car repair. Negotiating the check (any amount) cost $20! That is %20 if one wrote it for a hundred, otherwise it wasn't too bad for an emergency. also by paying it back quickly, I received more checks to use with the same offer and they keep advancing the dates for use.
I did get into trouble several years ago while waiting for disability and having to pay for all medical. It finally moved into the impossible. I did not have to take a bankruptcy, (SS cannot be attached) but did so. The card companies can write it all off in a bankruptcy and within 3 years they are offering new but limited cards. I have known many who put themselves into business with credit and the rich never use their own money for investment. The greater the investment, the more you can end up with in any noncollectable debt! If they don't worry about the national debt why should citizens worry about credit card debt for necessary purchases.
It is a good idea to keep some sort of record, like car repair to get children to school, house repair after fire or flood, replace clothing after robbery, or possibly as a last use of card, make a political donation to one good republican!

says a late payment on anythig -- not just the card -- will result in the default interest rate kicking in. They check your credit record every quarter, and if you were late on a car payment, mortgage, phone bill, anything . . .BOOM! If your friend has multiple cards, and that happens unexpectedly on just one of them his payback schedule could be thrown so out of whack that the rest of the cards will fall in short order.

After my divorce (she got the house, I got an apartment; she got the paid for Toyota, I got the unpaid for POS Honda; she got the furniture, I got the furniture payments) I could only find temp work for two years. I had to rely on my cards and for most of that time I barely made it making min payments. One small medical crisis, and I had to file for bankruptcy.

Your friend needs to get out of this trap ASAP.

To as much as 25%....

read the fine print carefully.

If you carry a balance to another billing cycle it could cause your low interst card to suddenly jump to 20%...

Or if you are late.....once.

They can even just raise it if they feel like it.


Predatory lending broguht to you by the GOP and Credit Card Lobby....

When you buy something at a store, the store pays a percentage of the sale to Visa, Mastercard, etc.

The bank issuing the card generally only makes its money off of interest and fees. Usually, the 0% doesn't last, they wait until your balance is high or you have one late payment to sock it to you.

on a small balance (1-2k) they will be about the same amount as the interest would be over a year...also, pay your bill way before the due date. one late payment will cost you $50 and the loss of the 0%, then jump to 18% plus range...if done right you can move a few K around for ever and not pay interest, but I think you friend has principal and interest confused...if you by something , you have to pay for it.