Credit card companies like to throw a lot of numbers and terms at you. Usually, they’re hard to understand.
You’re totally sure you need a new credit card. You definitely want to transfer a tricky balance to pay it off faster. But how do you know you’re getting the best deal possible?
One of the most enticing offers the credit card companies will dangle in front of you is a credit card promotional rate.
What’s a promotional rate?
It’s a low interest rate offered on your credit card balance for a certain period of time. Sometimes, it’s called a “promo” rate.
It might sound great at first, but there are necessary questions to ask before you jump at the first deal that catches your eye. If you handle the offer properly, you can do wonders at paying down your debt or ensuring that you don’t pay more than necessary for that big-ticket item.
An introductory interest rate is the most common type of credit card promotional rate. It usually applies to your balance during the first few months after you open a credit card, and an introductory interest rate is generally applied to balance transfers and purchases made on the credit card.
If a company offers you a promotional rate, it must last at least six months. For people with exceptional credit, offers can last up to 18 months.
So, before you make a decision, consider a few questions to make sure you’re going about it in the best way possible.
What’s the benefit?
A promo rate can be a legitimate opportunity for your finances. You likely aren’t going to get an incredibly low interest rate without taking advantage of a deal like a credit card promotional rate — especially if it’s a 0% interest rate.
If you’re planning on making a purchase on your credit card — a television, a vacation, even your monthly bills — and don’t plan pay it all off at once, a promo rate will keep your interest charges to a minimum, or even eliminate them entirely.
And if you have an existing credit card balance with a high interest rate that you’re struggling to pay down, you can transfer the balance to your new card with a promotional rate and get the benefit of little to no interest. Just make sure the offer includes free balance transfers, because they aren’t always part of the promotional rate.
With a credit card promotional rate, you can map out exactly how long it’ll take to pay down that stubborn balance because there will be no interest inflating the final number. The key is to have a plan to ensure your balance is paid off before the promotional window closes.
What’s the drawback?
It’s imperative that you don’t miss payments while taking advantage of a promo rate. If you’re more than 60 days delinquent on a payment, your special rate will be permanently revoked.
Another major mistake to avoid is confusing waived interest for deferred interest. The descriptions of two different types of interest is similar, so make sure you read the fine print carefully when weighing a credit card promotional rate.
With deferred interest, if you don’t pay off your balance by the end of the promotional period, you’re stuck with all of the interest charges you would’ve owed. For example, if the promotional rate lasts for six months and you don’t pay off the entire balance, you’re be responsible for six months’ worth of interest.
A credit card promotional rate might sound great at first, but there are necessary questions to ask before you jump at the first deal that catches your eye.
But with waived interest, if you don’t pay off your balance by the end of the promotional period, you’re only responsible for interest charges on the remaining balance going forward.
One way to tell if your promotional rate is a deferred-interest agreement is if it’s framed as a conditional promise: “You won’t pay any interest if it’s paid off in 12 months.”
When it comes to your money, never leave anything to chance. Always read the fine print, especially when your credit is at stake.
This seems too good to be true. What’s the catch?
Simply put, the offer gets you through the door.
Credit card companies, like any other business, need new customers. A credit card promotional rate is an enticing offer that attracts many people.
The credit card companies don’t make as much money when you’re under the promotional rate period, but they’re hoping you keep using the card after the promo rate expires.
Credit card companies usually make up for what they lost after the special offer is over by jacking up your interest rates beyond the average. Because if you don’t pay off your balance before the deal expires, then the higher interest rate is applied to your remaining balance — and that’s how they make boatloads of money.
Will my interest rate spike after the deal?
Depending on the offer, you can expect any credit card that comes with a significant promotional rate to increase to a double-digit interest rate after the deal ends. In some cases, interest rates spike well over 20 percent.
Before you accept any offer, figure out how much your interest rate will increase after the promo rate ends. Using a promotional rate to save money or get out of debt can certainly backfire if you’re unable to pay off your balance during the duration of the deal — and that could leave you in worse shape than when you started.
So, if you’re interested in harnessing the power of a promotional rate, look for a card that offers free balance transfers and a waived-interest structure, and then make sure you’re comfortable with the post-promotional rate.
Bottom line: Credit card promotional rates can be an effective way to get out from under a balance that’s hard to pay down due to a high interest rate. It’s also useful for people who want to make payments on a big-ticket item without overpaying. But take advantage of these opportunities carefully because they come with potential downfalls.