Tae-Nyun Kim, Associate Professor of Finance, was recently featured in a WalletHub article, “Best 0% APR Credit Cards.”
Why do banks offer 0% credit cards?
Banks offer 0% credit cards primarily as a marketing tool to attract new customers and encourage either balance transfers or new spending. While these cards initially generate no interest income, banks anticipate future profits once the promotional period ends and standard interest rates apply. Additionally, they earn revenue through balance transfer fees, late payment fees, and annual fees.
How much is a 0% intro rate worth to a consumer? And how does the length of that intro term affect the value?
The value of a 0% introductory rate can be substantial, especially for those carrying or planning to carry a large balance. For instance, avoiding interest on a $5,000 balance for 12 months—assuming a regular APR of around 20% – can save a consumer roughly $800 in interest charges. The longer the introductory period, the more time a consumer has to pay down the balance without accruing interest, thereby increasing the potential savings and reducing financial pressure. This makes longer promotional periods more attractive, especially for those with significant purchases or transferred balances.
Are 0% credit cards to blame for rising credit card debt levels?
While 0% credit cards may contribute to increased borrowing by making debt temporarily cheaper, they are not the primary cause of rising credit card debt levels. The broader increase in consumer debt is more closely tied to economic factors such as inflation, interest rate, unemployment rate, and the cost of living. Lack of financial literacy and budgeting skills also plays a significant role. However, 0% cards can exacerbate the problem if consumers treat them as “free money” without a clear repayment plan. Used carefully, they can help manage debt. Used recklessly, they can make it worse.