Should I use a zero-interest credit card for a large one-time purchase?

Question

An upcoming purchase (nearing $10,000, in the US) would drain savings more than I'd be comfortable with, and I'm wondering if using a zero-interest card to effectively spread out that purchase for 15-20 months would be sensible.

This is for a non-emergency but necessary medical expense.

There does not to appear to be any chance of not paying that balance off before the interest-free period expires. We have good general bill-paying discipline and I'd probably just automate the payments and get it to zero with some time to spare.

What I'm unsure of is: could I run afoul of unexpected "fees" or other costs? Would this affect my credit rating? I have no other recurring debt; all other credit cards are always paid off in full.

This seems to be quite different from a zero-interest balance transfer scenario.

Answer 1

Looking at the intended expense, it's (in my opinion) as if you asked "For a non-discretionary expense, do we tap our savings or take advantage of a zero-rate offer?"

The only advice, aside from discussing the card itself, is to suggest you ask the doctor/hospital if they offer either a discount for quick payment in full, or a payment plan at no interest. There's also a chance they can reduce the bill itself, if you have no insurance.

You seem to have addressed the card itself. The warnings are usually about the mistake along the way. One missed/late payment, and you'll owe interest, typically 24%, until it's paid off. By setting up an auto-pay and being 100% sure it's working, you'll be fine.

As far as credit report goes, it will appear as a debt, and your utilization will drop as you pay it down. Once paid, the impact fades quickly, as this is one of the scoring factors that's near real-time, in comparison to credit inquiries (2 years) or missed payments (7 years on report).

Answer 2

I want to make a note of something for other people that find this question and may have other purchases or cards in mind. With a card that is accepted everywhere (VISA, MC, Discover, etc) when you get a zero interest introductory offer for say... 18 months, you will not pay any interest for 18 months and then start paying interest on any remaining balance after that period. So, if you make a purchase for $2000 and pay $100 every month, you will end up paying interest on $200 after the 18 months.

Many store credit cards DO NOT work this way. For instance, let's say I go to Best Buy (not specifically picking on them, random example) and buy a fridge for $2500 and get "no payments and interest for 24 months" on my Best Buy store credit card. Then let's say I plan on making $100/month payment, but maybe I start making payments late or I forget one month or whatever. Well, interest starts to accrue on the entire $2500 and keeps getting calculated on the remaining balance every month. If you pay it off in the 24 months, that accrued interest goes away and you truly pay zero interest. However, if you go past that 24 month date by even a month, you pay the ENTIRE back-interest that has been accruing since day one (and it's a very high rate).

So, for store credit cards, always plan on paying off the purchase several months early, or use another way to pay that doesn't have such high risk.

As an example, I looked at the application page for a Home Depot store credit card. Applications usually have a lot of disclosures, so its a good place to find details like this and the Home Depot card always has this promotion. Sometimes it's extended to 12 or 24 months, but you always get the 6 month no interest "deal": PROMOTION TERMS: NO INTEREST IF PAID IN FULL WITHIN 6 MONTHS on purchases of $299 or more. Interest will be charged to your account from the purchase date if the purchase balance is not paid in full within 6 months.

It sounds clear when it's singled out like this, but it's not as noticeable when you need a new washing machine and there are flyers and banners touting "NO INTEREST 18 MONTHS!".

Answer 3

If you have the resources and the discipline to be sure that you can pay that loan off before interest is charged, the no-interest credit card is the better way to go.

Normally, you should not put a charge on a credit card which you cannot afford to pay for with cash equivalent at the time of purchase, because the amount with interest that you'll likely wind up paying is much higher. This post has some good advice.

However, there is generally value in aligning your expenses with the timing in which you will receive the benefit of those expenses, especially when there is not an interest cost. For example, if someone offered me a no-interest 25-year loan with regular monthly payments on solar panels guaranteed to last and perform for that long or longer, I would take that even if I had more than enough in the bank to cover the cost up front.

Sometimes, life events happen that require quick liquidity of assets, with expensive consequences if you don't have that flexibility available. By having this medical expense on a no-interest loan and keeping the savings secured in the bank, you are buying time to find creative solutions to deal with those situations should they come up, and in this case you're getting that for pretty much free thanks to the credit card promotion.

Will this affect your credit? Somewhat, but temporarily, especially if you manage it well (in which case it'll help you long term). If you're planning to apply for a mortgage (or other large interest-bearing loan) while the account would still be new and the balance would still be high, especially if you don't have a lot of available credit to keep overall revolving loan utilization low, this might be a bad idea and cost you more in the long run, particularly if your credit score is close to some threshold that would lock in different interest rates for a longer-term loan. But if you'll have it paid off before applying for that big loan, you're likely better off having proven you can manage credit well instead of having tapped savings.

As far as other fees, read the terms of the card carefully. Use of balance transfer / account access checks often incurs a fee of ~2% of the amount of the transaction, and if you're signing up for a new card advertising "no annual fee" be sure that's a permanent thing and not just "no annual fee for the first year, then $495 per year thereafter" or something like that. Usually this sort of fine print is not too long and those terms are not too hard to find as long as you're looking for them.

Also be sure you know what happens if you miss or are late on a payment, and don't do that. Sometimes, if you are even a bit late on one payment, you lose the no-interest promotion and have to pay the full amount of interest at the credit card's penalty rate, sometimes even retroactive to the time the purchase was charged. This is where the discipline of always making your monthly payment on time makes a huge difference.

Note that medical costs are a leading cause of bankruptcy in the US, and if some other unfortunate situation does land you in financial trouble, it is often easier to deal with medical debt as medical debt instead of as credit card debt. Working out a monthly payment plan with the medical provider, including trying to negotiate the overall price to be lower even with that plan, is probably a very useful first strategy, with the credit card option as a backup. It may even be better to forego points bonuses on a credit card to keep the debt as medical instead of credit card and have better financial flexibility with the savings.

Note: This answer on a related question may also be of interest.

Answer 4

Yes, pay it all off within the allotted zero-interest window and you will pay no interest.

If you plan to miss a monthly payment or plan to pay less than the requested monthly then make sure to read the fine print or else you will be shafted, period.

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I offer you an additional option:

If you have good credit and are willing to drop your score by 10-20 points then apply for as many sign up bonus credit cards as you can comfortably manage; see https://www.moneyunder30.com/credit-card-cash-sign-on-bonuses

Make sure to only sign up for cards with no annual fees!

Many of these have 0% intro rates and they can offer huge bonuses when you spend a minimum within the first 3 months. I've personally signed up for several cards under the terms of "Spend $500, get $150" and then never use the card again. The ROI (30% in my example) of these terms are unmatched by even the best stock options.

In theory, you could pay your $10,000 bill and get back $2,000-$3,000 for doing so.

Answer 5

The answer is probably, and the gain can be quantified by dollars by calculating the present value of an annuity.

Assuming 20 payments of $500 each month, and a 0.487% monthly real return (which corresponds to a 6% annual return), the present value of that annuity is $9506.65. This can be calculated in a spreadsheet with the function PV(0.00487,20,500).

In other words, the option of paying with an interest-free credit card is about $500 cheaper. Of course you've paid $10,000 in the end either way, but by paying later you'll end up with $500 in investment returns which you won't get by paying the full $10,000 today.

So unless you can find some other payment strategy that saves more than $500 (cash rewards card, negotiated discount for immediate payment) the interest-free card is the way to go.

Do be very careful to avoid any late payments. Review the terms carefully: often one mistake makes the entire interest due retroactively.

If the terms allow you to make a $10,000 payment at the end of 20 months rather than smaller payments over the 20 months, you can do even better: the present value is then only $9,074.08. So if the terms allow it and you have the discipline to save and invest the money for 20 months you can save about $1000.

Your debt to credit ratio is a significant factor in your credit score, but the negative impact goes away almost immediately after paying off the debt. Some banks have a free credit score check tool online that allows testing hypothetical situations like this, so you might be able to see just what the impact would be. In any case, unless you anticipate needing new credit before paying off the debt I wouldn't worry about it.

Answer 6

What I'm unsure of is: could I run afoul of unexpected "fees" or other costs?

The main fees would be if you're transferring a balance (very rarely, credit cards will offer not only a 0% interest rate but also a 0% transfer rate), and if you miss a payment. And if it's something like "no interest on purchases made in the first three months", you should look into whether payments go towards the zero interest purchases first. If you have $5000 accruing 0% and $100 accruing 24%, and you make a $200 payment, you don't want them saying "oh, we'll apply that entirely to the $5000 and leave the $100 gathering interest".

Would this affect my credit rating?

Probably. Part of your credit score is credit utilization, so if all your credit cards are maxed out, that will decrease your score. You mentioned other credit cards, but if you didn't already have other credit cards, you should see about getting them, both because that will decrease your utilization ratio (same utilization, but divided by larger total available credit) and because it will be harder to get credit cards once your other ones are maxed out.

Answer 7

One point that has not been addressed in the other answers is the manner of payment and how it affects how the payments are posted.

There are many different credit card offers out there. Some offer balance transfers (without transfer fee to those with poor credit, and transfer fees of up to 5% or more to those with stellar credit) with 0% interest on the transferred balance or on transferred balances and new purchases for n months where n can be anywhere from three to eighteen months (old purchases and new cash advances continue to be charged interest until paid off) etc. Now, by law (CARD Act of 2009), the minimum payment shown on each monthly statement must include all the fees charged during the previous month plus all interest (finance charges) for the previous month plus enough of the balance owed so as to ensure that the credit card is paid off in full in a reasonable period of time. Credit card companies seem to universally interpret this requirement as 1% of the balance is enough, and 100 months is a reasonable length of time in which to finish milking this cash cow.

But, also by the same law, if someone makes the minimum payment (in timely fashion), then the credit card company is free to apply that payment to any part of the balance; it is only the excess over and above the required minimum payment that must be applied to paying off that part of the balance that is being charged the highest interest rate, and then the next highest interest rate, and so on till all the excess is used up. Most credit card companies apply the minimum payment amount towards paying off the 0%-interest balance. So, if someone has a previous balance (to which the 0%-interest offer does not apply) as well as new purchases which are not being charged interest at all, then making only the required minimum payment means only the new purchases are being (slowly) paid off while what is owing on previous purchases continues to grow as interest continues to be charged on them. One has to make more than the minimum payment due (and make it in timely fashion too) to make a dent on those previous charges; else there is a nasty surprise waiting when the 18 months (or whatever period is on offer) of 0% interest are up.