published Wednesday, October 3rd, 2012

Personal Finance: Zero-interest credit cards now making a comeback

Chris Hopkins

If you're looking for confirmation of a thaw in the great credit freeze following the financial collapse, consult your mailbox.

After a four-year hiatus, the zero-interest credit card is back. For consumers with good credit but a bit of a debt hangover, this could be an opportunity to pay down balances and reduce interest expenditures.

Prior to the recession, banks aggressively promoted credit cards touting 0 percent introductory interest rates for limited periods of time, hoping to attract new customers who would stay on board after the teaser period ended.

Many of these offers were somewhat confusing and some even misleading. This time around, new regulations mandate a minimum six-month offer period for the zero rate, and many issuers are offering 18 months or longer.

Furthermore, many of these cards assess no annual fee. The trick here, of course, is to make sure the balance is paid off before the end of the teaser period, at which time the rate soars to more typical credit card interest levels (generally 11 percent to 22 percent, depending upon your creditworthiness).

If you currently carry a balance on high-interest cards and have a good FICO score, you might want to consider moving it to a zero-rate alternative.

While most issuers charge a 3 percent fee to transfer your balance from another card, this might be a good investment if your present rate is high enough, provided that you work hard to pay it off during the introductory rate period. And at least one bank offers a zero-rate card with no balance transfer fee, which is especially attractive and could save you hundreds of dollars.

Of course, it is essential to exercise discipline in exploiting these rate offers to avoid ending up with even more debt. Paying down credit cards is one of the most important personal financial steps one can take, regardless of the effective interest rate. It is imperative to resist the temptation to overspend on new purchases or delay repayment of the transferred balance just because there is no carrying cost for the next few months.

Also carefully review the fine print. Some cards merely defer the interest but continue to accrue it and then sock it to you if the balance is not paid off by the end of the intro period. And you will usually forfeit the entire deferral if you miss a payment date. Ouch.

Bear in mind that the mere act of applying for a new account will hurt your credit score for a period of time, but the reduction of your overall debt ultimately will compensate. Also, do not close the old account, as cancelling a credit card (even an unused one) ironically dings your FICO score.

Getting rid of old credit card debt is one key to a secure future. If you have the discipline and the cash flow to whittle down your balance within the waiver period, a zero-rate card offer can be a useful tool for reducing your debt load.

Christopher A. Hopkins CFA, is a vice president at Barnett & Co.

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