How Does 0 Percent Interest on a Credit Card Work?
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Zero Percent Offer Terms Vary
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Not all 0 percent credit card offers have the same terms, so it is important to read all of the terms on any particular offer prior to accepting it.
Credit Card Issuers
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In order to understand how 0 percent interest on a credit card works, it is important to understand how credit card issuers make money. Most credit cards are issued by financial institutions, usually banks. Even branded credit cards are issued through banks on behalf of the name brand selling the card. For example, the United Airlines Milage Plus Card is issued by Chase Bank.
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How 0 Percent Interest Still Makes Money for Credit Card Issuers
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Many consumers have the mistaken impression that 0 percent interest credit cards means that the bank does not make any money. The credit card issuer receives a processing fee for every transaction you make with the card. These fees vary widely, but can work out to around 1% per transaction. Since customers are more likely to make large purchases if they have 0 percent interest, the bank may actually make more money than if they did not have a 0 percent interest offer for that customer.
0 Percent Interest Credit Card Terms
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Although the terms vary between offers, some terms are common. First, if the customer breaks any rules such as paying late or going over the limit, the 0 percent interest ends and the regular interest rate starts. Second, most 0 percent offers state that all payments will be credited to the lowest interest rate balances first. If a customer charges $3,000 at 0 percent and then after the rate expires charges $500 at the normal rate, then every payment the customer makes will go to toward the 0 percent balance. The customer will then pay interest on the $500 until the $3,000 has been completely paid off.
Limited Time Offer
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Virtually all 0 percent interest rate offers expire after a certain amount of time. Banks that offer 0 percent hope that the customer will not cancel the card at the end of the 0 percent rate and have a customer from whom they can fully profit.
Higher Regular Rate
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Some, but not all, credit card issuers will attach a higher regular interest rate to credit cards that start with a 0 percent interest rate. When the introductory 0 percent interest rate expires, the card will have a higher interest rate than it would have had without the 0 percent introductory rate. This allows the card issuer to make up the cost of the 0 percent interest offer.
Zero Percent Interest Credit Card Account
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During the period in which there is 0 percent interest, the customer will pay no interest on the balance. For example, a customer who charged $500 in May would pay no interest on that $500 in June. So, if there were no more charges, the balance would stay at $500 until the promotion ends.
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