The Law

In the Schumer Box, named after Senator Charles Schumer who spurned the legislation requiring that credit card terms be clearly stated in a credit card company’s advertising, Capital One lists no annual fee and claims to be one of the 0 interest credit cards. But in the Schumer Box you’ll usually find the APRs for different transactions, the number of days in the grace period, annual fee, transaction fees and penalty fees.

On the Capital One Spark card you don’t get the $100 one-time bonus just for signing up for the card. Instead you earn that $100 only after spending $500 on purchases within the first three months of having the credit card.

Introductory Offers

But the focus of this post is 0 interest credit cards and introductory rates, or any other low-interest you’re offered. Introductory or intro being the key word. The 0 percent rate only lasts until May 2015 and it only applies to purchases. Say you’re lucky enough to receive this card sometime in October of 2014, you’ll not pay any interest on purchase for eight months.

Then what happens? If you’ve not paid that balance down to zero by the end of the May- 2015-billing period, your APR will be 10.9 percent, 14.9 percent or 18.9 percent, depending on your “creditworthiness.” And by the way all those rates are variable APRs.

Before shopping for a low APR card, examine how you use credit and how you plan to use it in the future.

Benefits of 0 Interest Credit Cards in the Short-Term

Most of the low-interest intro cards don’t charge an annual fee and also don’t come with much in the way of rewards. Low-interest credit cards, however, make the ideal tool if you’re planning on making one major purchase in the very near future and you plan to definitely pay it off before the introductory or promotional period ends.

Often these credit cards with a 0 percent teaser rate present you with a good opportunity to transfer an outstanding balance from another card. But that’s only if you pay the new card off within the promotional period.

If you have a desperate financial need, using a credit card with a 0 percent intro APR makes a much better solution than selling a structured settlement or applying for a payday loan, according to the professionals at a structured settlement purchasing company Strategic Capital (www.strategiccapital.com). Then you can repay the credit card with your structured settlement payments if that’s something you have.

Calculating your Best Option

Think seriously about what you can and can’t do. If you know that chances are good you won’t be able to pay off the balance on the 0 percent card because the introductory rate only lasts for four months, then it’s probably not the right card for you. You may very well get dinged with a whopping variable APR rate of 18.9 or even 22.9 percent after that.

But if you know you can pay off the balance on your old card within a year and it has a fairly low 10.9 percent interest rate, then stick with the old one.

Ask to Lower Your Rate

Call the customer service number on the back of your current credit card. Tell the representative that you got this terrific offer from (brand-name credit card company) in the mail. Say something like “I’ve been your customer since ___ (how many years) and I’ve made my payments on time. I’d like to keep on doing business with you, but this offer is hard to turn down. Would you be willing to match it?”

Tip:

Never apply for a new credit card while you’re in the process of buying a home or a car.

Business People Beware

If you own your own business and have a special card that you use only for business transactions, how credit card payments are applied may not be in your best interest. The payment allocation rules from the Credit CARD Act (we’ll talk about those later) don’t apply to business cards.

If you have the following balances on your credit card:

• $200 of balance transfer debt at 0 percent APR
• $200 worth of purchases at 10 percent APR
• $200 of cash advance debt at 20 percent APR

Then you owe $600. When you make a $100 payment on that card, the bank can use it to pay off the debt with the lowest APR first, which would be the balance transfer debt in this case. That obviously doesn’t work in your favor because you still have the higher APR balances amassing interest at an alarming rate.

The good news is that some credit card companies do follow the Credit CARD Act rules on payment allocation for business credit cards. Read the terms and conditions of your credit card agreement to see if your company is following the old guidelines or the new rules. But beware that they have the ability to revert to the old if they want. Of course credit cards with 0 APR don’t have to worry about getting stuck paying interest.

What Does the Credit CARD Act Say?

As of February 2010 the above method for applying credit card payments was prohibited, but only on consumer credit cards. But there’s another caveat, also.

You have to make more than the minimum payment on your credit card to reap the benefits of the Credit CARD Act. That benefit is: credit card companies must apply consumer’s payments to the highest APR balance.

Change the scenario above from a business credit card to a consumer credit card and that $100 payment goes right to the cash advance debt, which is much more advantageous to you, the cardholder. And just another good reason to pay more than the minimum payment on your account.

Make Your Payment a No Brainier

Besides paying 15 percent or more on your credit card each month, you can make the payment application simple and easy by just having one type of transaction on each card. In other words, use one card for purchases, another for balance transfers and if you really have to, a third for cash advances. And don’t transfer balances to cards that have a purchase balance or make purchases on a credit card that you transferred a balance to. Keep it clean and easy.

That leaves no doubt on how your payments will be allocated. Of course you’ll have three payments, but it’s still the best way to simplify your finances. It also puts you in control of the way your payments are applied, not the credit card company plus it keeps costs down.

Credit Cards 0 APR Tip:

A low interest rate is great, but that’s not all that matters. If you only pay the minimum payment on your higher rate balance, that balance may not decrease at all. In fact when the finance charges are added, unless you have credit cards with 0 APR, your balance could increase.

When you have a Credit Card with No Interest and Things Change

Let’s talk about variable rates and what that means. Most credit cards have a variable rate for purchases. In the case of Navy Federal Credit Union, variable means the rate can change monthly. With some credit card companies the rate may change either monthly or quarterly. And without notice. What triggers this rate change?

A variable-rate APR usually changes when the index interest rate changes, like the prime rate published in the Wall Street Journal. The prime rate moves up and down according to the interest rate set by the Federal Reserve. When your newspaper says the Feds have raised interest rates that means your variable APR is going up, too.

If you read the fine print or “terms and conditions” for your credit card, you’ll usually find the variable rate expressed as an index plus a margin. So if it says, “Index + 12.99 percent” and your index is the prime rate and that is 4 percent, your card’s interest would be 16.99 percent.

Most banks use the average prime rate which has been between 6-10 percent for a number of years now. If you sense the Prime Rate is going down, you’ll want to have a variable-rate APR card in your arsenal.

When the APR stays the same

Fixed-rate credit cards, ones with rates that don’t fluctuate with the prime rate, exist, but they are difficult to find. My friend, Beverly Harzog says in her credit card blog (http://www.beverlyharzog.com/my-blog/), that you rarely see cards with ongoing fixed rates. You’re more likely to find them as introductory APRs with an ending date. So you may have a credit card with no interest, but will that change? And how credit card interest is charged can change too – even grace periods are not guaranteed, so be sure you read the fine print.

Even a fixed APR can change if the issuer notifies you 45 days in advance. Before the Credit CARD of 2009, banks only had to give you a 15-day notice. Now it’s a more sensible 45 days. Also, the higher rate only applies to transactions made after you get the notice. Even if you find a fixed rate card, you might not qualify for it.

Your credit score determines your APR

Even though you see an ad that says a credit card has an APR of 7.99 or 8.99 percent, that doesn’t mean you’ll get that rate. Joe, your neighbor up the street with the Ferrari might, but you may not. You’re assigned a rate according to your credit score. A low credit score almost always means a higher APR.

Tip: Visit Annual credit report and get your free credit report before wasting time applying for a credit card that may be beyond your reach.

0 Percent Credit Cards and Interest on Purchases

No worries if you pay off your credit card balance in full every month before the due date. The time between the end of a billing cycle and the due date for your payment is called a “grace period.” Most credit cards have them, but watch out for the ones that don’t. This period varies by issuer, but usually runs between 21-25 days. If you pay your balance within the grace period, no interest is charged. But this usually applies to purchase transactions only. In a perfect world you don’t have a credit card account balance, but what if you’re a teensy bit imperfect and can’t pay the balance in full?

When you carry some of your credit card balance forward into the next month, you’re charged interest on that unpaid balance, unless you have 0 percent credit cards. The interest amount has to do with your Annual Percentage Rate, or APR, which is the fee you pay for the privilege of borrowing money. If you have a low APR and keep a low outstanding balance, then you pay less money in interest. But if you have a higher APR and a high outstanding balance, then you pay more money in interest.

Interest rates for goods and services are usually lower than those for cash advances; there is also usually a specific credit card cash advance fee.

Interest on Cash Advances

When you ask for a cash advance or write one of those “free” checks the bank sends you, you pay a higher rate of interest on those transactions than you do for purchases. Plus the interest on cash advances and “free” checks starts accruing the minute you use them. So those checks really aren’t free at all.

You’ll also be charged interest whenever you start the billing cycle with any balance on your card, whether it’s from purchases, a cash advance or writing a “convenience” check.

Checks that you write to transfer a balance to another card aren’t subject to the same interest rate as those checks banks send you as a “convenience.”

Calculating Daily APR

The credit card interest rate is usually expressed as an annual rate or APR while daily interest rate is determined by dividing the APR by either 360 or 365 (days), depending on the credit card company. Then that number is multiplied by the amount owed at the end of each day in the billing cycle. That amount is then added to the previous day’s balance. Credit card interest compounds on a daily basis.

That’s great for the bank backing the credit card, but not so good for you.

Tip: Watch out for the interest changing from the time you order the credit card until it arrives in your mailbox. The fine print must have said that the lower rate was “only for people who qualify.”