Why you may be paying interest on your zero per cent credit card

Zero per cent credit cards can be an excellent way to reduce the cost of borrowing money, but they may actually cost the user interest if he or she isn’t aware of how the card operates. It’s always a good idea to know how a credit card makes its money to then be able to take best advantage of it.

Zero per cent interest rates are offerred either on balance transfers or spending, very rarely on both. If the zero per cent rate is on spending, any balances transferred to the card will be charged interest. The opposite applies when the zero per cent interest offer is on a balance transfer; any purchases charged to the card will accrue interest. Usually this interest is higher than that of a standard credit card.

There’s another factor at play here. With most credit cards there is a repayment hierarchy, meaning that repayments will be applied to the balance with the lowest interest rate first, leaving higher rate balances accruing interest until the first is discharged. Only then will repayments go toward paying off the next highest rate balance. In that way, the actual interest on the credit card is higher than would otherwise be expected.

Cash advances are charged at one of the highest rates of all balances. This may be for withdrawing cash at an ATM using the credit card, but it can cover other uses such as using the credit card for gambling or to buy foreign currency. Cash advances are also, unlike purchases, charged interest from the day of the transaction, with no interest free grace period.

When the introductory time limit for the zero per cent balance is complete, the card will start charging interest on the previously interest free element. In a few rare cases the credit card company may backdate the interest if any of that balance remains outstanding at the date the introductory offer runs out, but this has become very unusual.

Although this isn’t an actual interest rate, another way zero per cent interest credit cards can cost the user money is through charging fees, such as the annual fee, inactivity fees, and balance transfer fees. All told, these fees may add a considerable amount to the cost of credit.