Ask an Expert: Does a Low Ongoing Rate Beat a 0 Percent Intro Offer?

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This post comes from Jason Bushey, who writes about credit cards and personal finance topics daily on Creditnet.com.

I recently received this email from a Money Talks News reader:

I’m in the market for a new card and was eager to hear your opinion on the matter. I generally carry a small balance – usually less than $500 – and my credit score was just over 700 the last time I checked.

Would it make more sense to apply for a 0 percent introductory card with a slightly higher ongoing APR now, or a card with no intro offer but a low APR right away? I don’t like to carry a ton of cards, so I plan on keeping this card for the long haul. Thanks! — Dan P.

My response

That’s a great question, Dan, and I’m glad you included a little information about your spending habits. That really makes a difference when determining which type of card works best for you.

Zero-percent credit card offers can bring out the best and worst in consumers. I say that because some consumers use them for good – like paying down an existing balance interest-free and eliminating debt – while others run up a balance that’s hard to pay off once the introductory offer expires and their APR kicks in.

Of course, some of us (Dan included) fall somewhere in the middle when it comes to using cards with an interest-free intro period. We’ll pay off some debt while taking advantage of no interest applied to new purchases, keeping a low but active balance even after our introductory offer expires. That’s when it’s important to carry a card with low ongoing interest – when the intro period expires but your balance does not.

So what’s the right answer? This is a tough call because ultimately there are a lot of factors in play, including your spending habits, your credit score, and the ongoing APR you’re most likely to qualify for — which is ultimately determined by the credit card issuer.

Taking all that into consideration, I would still say that a 0 percent credit card beats out a low-APR card with no introductory offer. Here’s why:

Balance transfers

The most useful 0 percent interest cards are the ones that apply this offer to balance transfers. Transferring debt to such a card allows consumers to pay down an existing balance interest-free for anywhere from six to 18 months depending on the card. The standard fee for such a transaction is 3 percent of the debt being transferred (though there are exceptions), and this is simply the best option available for consumers with good credit who are hoping to pay off their debt.

Many low-APR cards include a balance-transfer option, often for a smaller (or no) fee. But even then, the math still favors 0 percent credit cards.

Big purchases

If you can’t pay down a big purchase made with a credit card quickly, then you shouldn’t be making that big purchase. But if you can pay it back with haste – say within one to three months, max – then a 0 percent interest card gives you the chance to pay down a big purchase in pieces at no additional charge. It’s not recommended, but it’s a fact of interest-free introductory offers.

The same cannot be said for cards that do not offer a 0 percent period at any point. Sure, you can still pay in increments, but you’re going to pay at least some interest on that big purchase. Again, the advantage goes to the interest-free offer.

Many 0 percent intro cards have low APRs anyway

Here’s the biggest reason I would opt for a 0 percent interest card: Many of the 0 percent offers on the market today offer low starting variable APRs too. They may not be as low as the Barclaycard Ring MasterCard, which features an 8 percent variable APR but no introductory offer, or the Simmons First Visa Platinum, whose variable APR starts at 7.25 percent but also offers no interest-free period. But they’re still very competitive.

Take Discover it, for example, which offers a variable APR starting at 10.99 percent and a 0 percent intro period of 14 months applied to purchases and balance transfers. Granted, that variable APR can stretch as high as 22.99 percent, according to Discover, but again this is determined by the issuer based on the applicant’s creditworthiness.

The question you should ask yourself here is: Why sacrifice the chance at an extended 0 percent interest offer in exchange for saving a few ongoing interest rate percentage points?

In conclusion

Ultimately, your creditworthiness in the eyes of the credit card company will determine what your variable APR is. You’re of course more likely to be approved for a lower APR if you apply for a card with a lower starting interest rate, but there are no guarantees as to what that number will look like until you’re approved.

Zero-percent credit cards do however guarantee an interest-free period upon approval, though that intro offer can become null and void if, for example, a new cardholder pays late or defaults completely on a payment. But when it comes down to it, 0 percent credit cards still represent a better offer to consumers like Dan who have good credit and carry a balance.

That said, this conversation would be a much easier one if you carry no balance at all. No balance means no interest, every time. Simple, right?

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