How Do Credit Cards With a 0% Introductory APR Make a Profit?
You may have seen advertisements on television or received offers in the mail for credit cards that boast a zero percent interest rate. While this appears to be an excellent deal on the surface, it isn't for everyone. Zero percent introductory interest rates may temporarily eliminate interest charges, but that doesn't stop the credit card company from making a profit over the long term.
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Significance
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Credit card companies often market credit cards that carry a zero percent interest rate to customers who already carry credit card balances with other companies. The goal is to encourage individuals to transfer their balances--along with their business--to the new company. Depending on the credit card company's rules, the low interest rate may apply only to the transferred balance while a second, higher interest rate applies to new purchases. Some customers assume that the interest rate applies to all purchases they make and accrue additional charges on the new credit card. The credit card company charges interest on the new purchases and makes a profit.
Time Frame
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Introductory zero percent interest rates remain in effect only for a limited period of time--usually six months to one year. Once this time frame expires, a default interest rate goes into effect. Although the Credit Card Accountability, Responsibility and Disclosure Act (CARD Act) of 2009 prohibits credit card companies from raising interest rates on existing balances, this provision does not apply to credit cards that carry an introductory rate. Thus, the credit card company increases the interest rate it charges after the introductory period and immediately begins to make a profit on the balance an individual carries on the credit card.
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Considerations
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A credit card company makes a profit from the amount of interest it charges and any fees it levies against users. If an individual makes a payment to his credit card provider 60 days late, the credit card provider has the right not only to revoke his zero percent introductory interest rate, but also to charge him a substantial fee. The fee, plus any additional interest the credit card company collects by withdrawing the introductory rate early, translates to pure profit for the company.
Benefits
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A credit card company that offers zero percent introductory rates can attract new customers who would not otherwise have considered applying for a credit card with that company. If the customer is pleased with the company and the way it does business, she may remain a customer for many years to come--long after her initial introductory rate expires. In addition, pleased customers often tell others about their good experiences and lead more individuals to apply for credit cards with the company. Attracting new, long-term customers allows a credit card company to make a substantial profit in interest charges over time and also profit from the new customers that happy customers generate.
Features
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Credit card companies expect consumers to transfer existing balances in order to take advantage of low introductory rates. According to the Federal Reserve Board, some credit card companies charge a fee for this privilege. Fees can be static, but many are calculated as a percentage of the total card balance. If an individual's existing balance is high enough, the credit card company can make a greater profit from the balance transfer fee than it could from levying standard interest charges throughout the introductory period.
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