The Introductory Rate Credit Card Trap

Almost everyone at one time or another gets a “great credit card rate” offer in the mail. To entice you to sign up, they offer a low introductory annual percentage rate (APR). The rate offered depends mostly on your current credit rating, but it’s not uncommon to see introductory rates as low as 1.9%. Some companies even offer 0% rates to a lucky (or unlucky) few. They may also waive any transfer fees if you transfer an outstanding balance from a competing credit card. Who can resist these kinds of offers?

What Happens After the Introductory Period?

Be careful, though. Before accepting this kind of offer, look through the fine print for two key pieces of information:

The interest rate jump at the end of the intro period may surprise you. It’s not uncommon to see the rate jump to 18.9%, for example. If you’re carrying a balance (and you probably are, otherwise you wouldn’t be considering a low-rate offer) this can significantly increase your interest costs and lengthen the time it will take you to pay off the entire balance.

Look carefully for any transfer fees as well. Many cards charge a percentage of the balance transferred from a loan or credit card. That charge gets added to the outstanding balance on the new credit card. A transfer fee of 3% is fairly common. Such transfer fees increase the effective interest rate of the card, so be sure to factor them into your calculations.

Get The Payoff Date

Low-rate offers are useful if you’re trying to pay down debt, because more of your money goes towards the principal. It may be possible to pay off the entire debt within the introductory period.

If it’s not, though, and you still choose to accept the offer, you’ll have a balance to repay at the end of the introductory period. If you choose not to repay it, you’ll be charged the regular (much higher) interest rate.

You need to know when this happens. After you’ve received the card, phone the credit card issuer and ask them exactly when the introductory rate period ends. Pay off as much of the debt as possible before this date. You’ll save money doing this and you’ll know when the higher monthly payments will start.

Use credit card offers wisely and you’ll avoid a lot of grief.

Comments

2 Responses to “The Introductory Rate Credit Card Trap”

  1. Mary on May 2nd, 2008 8:03 am

    Can a company raise the introductory rate during the specified period if I have met ALL conditions set forth to maintain this rate? (ie: payments made on time, etc)

  2. admin on May 2nd, 2008 9:06 am

    It would depend on the credit card agreement. Look at the back of the bill, the terms and conditions are usually summarized there in fine print. The best place to look, though, is the booklet you should received with the card that describes the cardholder agreement in full.

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