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What is a 0% credit card and how does it work? Are they a good idea and can they have a legitimate place within a broader financial plan? Financial planners tend to encourage clients away from credit cards because the interest payments can be very punitive – eroding your income and undermining your progress towards your goals.
However, 0% credit cards offer a slightly different case due to the 0% interest involved (for an initial period). Below, we explain how they usually operate including balance transfers and purchases. We hope these insights are helpful to you.
Please get in touch for more information or to discuss your own financial plan with us.
What are 0% credit cards?
Normally, when you use a credit card (e.g. to book a flight) you are borrowing the money from your bank or building society. You then have a limited time – usually around a month – to repay them before an interest payment is charged.
In 2023, the average credit card interest rate (APR) is about 22.2%. So, if you spend £100 on your credit card and do not pay it off quickly enough, you could end up with a £22.20 interest bill to repay. Over 12 months, if left unchecked (and assuming no other charges apply), the original £100 could lead to a debt of £222.20 – more than double what was originally borrowed. This is why credit cards are often frowned upon.
A 0% credit card operates much the same way. However, the initial period (after taking out the card) does not charge any interest if you fail to pay off any spending on the card. In 2023, some 0% credit cards offer up to 22 months’ worth of interest-free spending.
Are they a good idea?
First of all, not everyone can take out a 0% credit card. You need to pass eligibility tests from the lender(s) beforehand. People with a low credit score may be offered nothing or less attractive options. Your income is also a key factor. Lenders want to be confident that you can eventually pay them back once the interest-free period is over.
One advantage of a 0% credit card is that, due to the initial interest-free period, an individual could repay the card more easily by spreading the payments out over more time. For instance, repaying £1,000 over a 20-month interest-free period would involve paying £50 a month to clear the debt. By contrast, repaying £1,000 on a normal credit card with a 20% interest rate could easily spin out of control if the debt is not settled quickly.
Ideally, as financial planners, we need to stress that credit cards should generally be avoided since most people struggle to keep on top of repayments. Over time, the debt can snowball. Humans are easily lured into instant gratification and credit cards appear to impose no/little immediate cost on lavish spending. Yet the consequences eventually catch up with us.
With that said, we recognise that many people do struggle with debts and credit cards are a feature of life. Two-thirds of British people have at least one credit card and the average consumer spends £333.11 each month using them. Meanwhile, almost half of British people do not know what “APR” stands for and the average credit card debt is £1,174.62.
Options moving forward
For those reading without credit card debt, well done. The statistics above suggest that this is quite an achievement. Try to keep that habit going. Yet what about those who are considering a 0% credit card or those saddled with high-interest debts?
Naturally, having up to 22 months as an interest-free “grace period” could offer some people much-needed breathing space to start gaining control of their finances. Yet you need to be disciplined and see the 0% period as a lifeline, not an excuse to carry on with lavish spending.
Check your eligibility for deals and then draw up a plan about how your debt(s) will be repaid over the interest-free period. Some providers will let you move your existing credit card debt to their 0% deal. If this is possible and you can clear everything before the grace period finishes, then you could make a huge improvement to your financial situation.
As financial planners, we often remind clients about the importance of having an “emergency fund” (e.g. 3-6 months’ worth of living costs) ready in easy-access savings. These can be invaluable if your finances are suddenly hit by a large expense, loss of work or a similar problem. When repaying credit card debt, you will need to carefully balance this with the need to build and maintain an emergency fund. Be aggressive with repaying the debt, yet not so aggressive that you leave yourself vulnerable due to the absence of a safety net.
Invitation
If you are interested in starting a conversation about your own financial plan or investments, then we’d love to hear from you.
Please contact us to arrange a free, no-commitment consultation with a member of our team here at Elmfield Financial Planning in Padiham, Burnley, Lancashire.
Reach us via:
T: 01282 772938
