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

Zero per cent credit cards advertise that they do not charge interest, and this is a compelling promise. However, sometimes zero per cent credit cards do indeed charge interest. When cardholders understand how and why this is done, they will be able to take better advantage of these offers.

The first thing that should be understood about zero per cent credit cards is that they are not designed to transfer wealth from the issuing financial institution to the credit card holder. They are in fact a marketing device. The banks are using the zero per cent credit cards as a cheaper way to attract a new customer than would be possible through traditional advertising methods. In short, they expect to make money off the deal.

The major way that these cards charge interest is through various categories of balances. Credit cards tend to charge different interest rates on balances incurred in different manners. This means there’s one balance that has resulted from a transfer, another from purchases, and another from cash advances. These balances are usually charged interest at different rates, and even a zero per cent credit card offer will likely charge interest on at least one of these balances.

If a person transfers a balance to a zero per cent credit card and then makes purchases using the same card, then interest is generally charged on that purchase balance. The issuing bank will then apply the repayments made against the zero per cent balance first, rather than attributing it equally, drawing out the time the interest-bearing balance is active and reducing the duration of the zero per cent balance.

Another way in which a borrower with a zero per cent credit card can pay interest is by continuing to hold and use the credit card after the offer has run out. This is why credit card users should re-examine their interest rates and credit card agreements periodically.

Although fees are not interest, fees such as balance transfer fees, inactivity fees, and annual fees can add to the cost of a zero per cent credit card.

Zero per cent credit cards can be powerful tools for borrowers, but they are not designed as a free gift and must be understood to be used properly.