Zero percent doesn't necessarily mean zero worries
Credit card companies are once again offering free money — or it sure looks free when you see a huge zero percent plastered on the envelope.
Open that new plastic, buy now and get zero percent until August 2014? Yes, you're not imagining things. Credit card experts say we're seeing the best promotions for plastic since the Great Recession.
“It was free money to me in some sense,” said Donald Grimes, an economist at the University of Michigan.
Grimes jumped at a zero percent deal that runs 18 months to buy an Apple laptop. But he plans to pay off the purchase before an 18 percent annual percentage rate kicks in — retroactively on this deal — if the purchase is not paid off in 18 months.
“I've played that game, and I know how to do it,” Grimes said.
The latest run of zero percent offers — including zero percent financing deals at stores and zero percent introductory-rate major credit cards — is one more sign that the worst is over for the economy.
“The economy is definitely coming back, and the credit card industry is definitely making a bet on that,” said Tim Chen, CEO of NerdWallet.com, which compares everything from credit cards to checking accounts to airline fees.
More jobs mean more people can pay their credit card bills. Credit card issuers are able to offer zero percent rates to a significant group of consumers now because the expectation is that interest rates will remain low and the unemployment rate won't climb dramatically through the end of 2014. If that's correct, economists say, it would be a while before rates increase appreciatively.
Banks also have so much in additional reserves that they have a good deal of money to lend, as well.
Yet, do all those zero percent deals mean we're heading back to the oh-too-easy credit days when borrowers basically went on a bender? Not there yet, economists and credit card experts say.
The latest zero percent offers are going to people who have good credit and are likely to make their payments, according to Greg McBride, senior financial analyst for Bankrate.com.
The deals aren't just for six months anymore — again, indicating more optimism that the worst may be behind us. Some zero percent rate deals can be strung out for 15 months, 18 months or even 21 months, depending on the offer.
But Grimes, senior research specialist for the U-M Institute for Research on Labor, Employment and the Economy, said he is concerned about potential problems ahead after seeing the personal savings rate drop to 2.6 percent in the first quarter, compared with 4.7 percent in the fourth quarter last year.
Consumers could be stretching more, he said, to deal with a 2-percentage point increase in the payroll tax that began Jan. 1. Will some be tempted to borrow too much?
Right now, though, zero percent could be a great deal for those who want to borrow and pay down old debt sensibly.
What's the best deal for you?
If taking on new debt, consumers would want to know what the payments would be each month so that they would be able to pay off their debt at zero percent before the offer ends in 15 months or 18 months.
Simple math: Take the amount of the debt and divide by the number of months you have at zero percent. So if you spend $6,000 on the card, you'd want to pay $400 a month to have that debt paid off in 15 months.
Are you struggling to take care of some old debt? If so, how much will you pay to transfer a balance if tackling an old balance is part of your strategy?
“The balance transfer fee plays a big role,” said Odysseas Papadimitriou, CEO of CardHub.com.
Make sure you understand what kind of debt can be transferred to a card, too. Some cards will not allow consumers to transfer balances from store credit cards, such as a Macy's credit card.
And remember these cards can still go from zero percent to to 20 percent. Much of that will depend on your creditworthiness. The Capital One Prestige Card, for example, offers variable rates ranging from 10.9 to 18.9 percent.
Consumers need to look at the big picture of credit, too. If you're looking to refinance the house or take out a new car loan now, think twice about jumping at zero percent offers. You typically don't want to open a new credit card before applying for a major loan in the next 12 months, McBride said.
Susan Tompor is the personal finance columnist for the Detroit Free Press. She can be reached at email@example.com.