I am sure most of you have come across a 0% financing offer typically when buying large ticket items such as electronics (TVs, cameras), large appliances, jewelry, mattresses, and furniture. 0% financing is also referred to as 0% promotional financing or “no interest if paid in full”. You might also come across 0% financing offers on lower ticket items because banks know they can make money.
I have worked in the financial services industry and want to share some tips about using 0% financing.
I can tell you first hand that banks are counting on you to miss payments, get late fees, get charged interest for not paying your balance in full, and hope you forget about the 0% financing promotional period in which the interest rate (APR) will then skyrocket.
Here are 7 things to keep in mind with 0% financing
1. 0% financing can be good, but be aware of the bad
Although I have personally not taken advantage of a 0% financing offer, I have marketed many 0% financing offers to acquire new cardholders and entice existing cardholders. After you have read through the rest of the tips, if you truly, honestly can tell yourself that you will avoid any of the financing traps, then I think taking advantage of a 0% financing offer is fine.
2. Always pay off your balance before the promotional financing period ends
I need to emphasize this as much as possible. This is the number one reason why banks make money off you because of the extremely high interest rate (APR) you will be charged. The 0% financing offer will be active for only a certain number of months. For example, 0% financing for 12 months means as long as you pay off the entire balance before the 12 months is up, you will not be charged interest. However, if you do not pay off the entire balance by the 12th month, then you will be responsible for the interest accrued and usually a double digit interest rate (>20%).
3. Read the fine print on the interest rate (APR) in case you end up paying after the financing period
It is never a good idea to have your balance carry over after the promotional financing period ends. If you read the fine print, you will see what the APR will be after the promotional period ends. Paying any interest charge is a complete waste of money. Additionally, you might have to pay all the interest accrued since the beginning of the promotional period.
4. Look for recurring payment options so you do not miss a monthly payment
As seen from a couple of the tips above, you want to make sure you pay off the entire balance within the promotional period. If you miss a monthly payment, this could cause you to have a small balance at the end if you do not remember to play catch up with your payments.
The easiest way to prevent missing a monthly payment is to automate the payment. Enroll in recurring payments so that your payment is due on the same day every month. Set it and forget it.
If you cannot resist the urge to use 0% financing, then make sure the plan provides an option to automate your payment.
5. Be mindful of credit utilization and how much debt (credit) you are using
If you really care about your credit score because you might be interested in applying for a mortgage, then there are several ways to improve your credit score. Having a low credit utilization rate is important because having too much debt compared to how much open credit you have available is a signal to creditors that you might be borrowing too much. The majority of financial experts seem to say that having less than 30% credit utilization is the key. I personally aim for less than 5% to also help manage my debt.
6. You might spend more than what you can really afford
It is really easy to hand over plastic and charge a card. Be truthful to yourself about how much you can really afford to spend. One of the biggest problems with credit cards (and how banks make money off you) is not paying your balance in full and getting charged a high interest rate.
0% financing offers are usually enticing customers by also showing the minimum monthly payment amount. For banks, it is a requirement to show the number of months for the promotional financing period and how much the minimum monthly payments are. When you see such a low number in the form of a monthly payment, it is really easy to trick yourself into thinking you can afford more than you really can.
7. If you have multiple 0% financing offers using the same credit card or with the same retailer, double check how your payments are being allocated
Whether the banks are being deceitful or not, it can get very confusing if you take advantage of multiple 0% financing offers from the same retailer or using the same credit card. Banks are required to disclose the financing terms, but the disclosure (“fine print”) can be very lengthy and nothing but text.
My recommendation is to make sure you call up your credit issuer and make sure they are not making payments to 1 financing offer, but separately since that is what you are most likely intending. Sometimes they will allocate both payments to the 1 financing offer first, so at the end you might not have realized you missed payments on the other item.