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If I get a credit card that features an "intro purchase APR" of 0% for the first 12 months, make several purchases with it in the first couple of months that max out my line of credit with it, and only make minimum payments, before finally paying in full before the end of the 12th month, then is my understanding correct that I should be paying no fee and no interest at all - so the credit card issuer essentially gave me a free one year loan?

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  • The minimum payment is calculated by the credit card and is typically in your terms and agreements. nerdwallet.com/article/credit-cards/…
    – Ron Beyer
    Feb 25 at 16:34
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    Based on your edit, yes, this is the case. The CC is banking on you not being able to do that though, and you will get a very high interest rate at the end. Standard advice follows here, don't charge more than you can pay off in full when the bill comes.
    – Ron Beyer
    Feb 25 at 16:35
  • Thanks a lot @RonBeyer :) Feb 25 at 16:40
  • Title and description mismatch. Only purchases are usually without interest, not cash advances.
    – paulj
    Feb 25 at 17:38
  • @paulj well it's still a loan if you buy a bunch of stuff and then only have to actually pay for it a year later. Sure, it's not cash, but still a loan in essence. Feb 25 at 18:42

3 Answers 3

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Yes it is a free loan.

There are two types of offers. A credit card working independently to get customers, and one where the credit card company and a store are working together on the offer.

Many times you will see a sign at the cash register saying get x% off if you sign up for the credit card, or pay 0% for 12 months on TVs purchased for more than $600.

But there are costs:

  • The interest rate they are deferring and then forgiving can be very large, read all the fine print. You don't want to miss a payment.
  • At the end of this you will now have a new credit card. Sometimes that is a store card that can only be used at that store. Or it is a card that only gives the maximum cash back, or miles, or points at that store, and only basic benefits at other places. You have to determine if you want to have this card on your credit file long term, or is this a one time event.
  • Make sure the new card doesn't have an annual fee that will be kick in 365 days from now. That surprise could wipe out much of your benefit.
  • There are hits to your credit score while applying for the card, and while carrying the debt.
  • If you can't pay the debt in a year, you need to be able to find another 0% interest card that will accept a debt transfer for no fee or very low fees.

Why does the credit card company do this? Customer acquisition. Advertising costs money. Sending letters to potential new customers costs money. This is just a different avenue.

Why does a store do this? They get their money now, even though you are financing it. To get you to become a loyal customer

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Yes, it's a free loan; but.

  • For credit card payments, the seller pays a fee to the credit card company (2-5% typically); this makes the deal easy for the credit card company, as they already got their 'interest', upfront, and risk-free.
  • As others mentioned, they hope for you to miss a payment or not be able to pay fully off, and then they won the jackpot.
  • For you, even if you make all payments on time, the biggest disadvantage is a credit score loss - if you nearly max out the card, your credit usage will be heavily up, aside from the 'hard query' and the 'additional credit card' you now have. That might not be of relevance for you - if you drop from 830 to 810, who cares? But if you drop from 650 to 600, and want to buy a home or a car in six months, you'll pay easily 0.5% or 1% more on your mortgage / car loan, or not even get one.
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  • Your last point about the possible effect on credit score is a good one.
    – TTT
    Feb 27 at 1:59
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Well it's not always "free".

Typically, when something is offered at "0% for 12 months", the financing cost is baked into the sales price. That is why you often see options like 0% for 12 months or a 5% discount, for example. Even if it's not advertised, you may even get a discount if you haggle over the price.

It's also common for them to "accrue" interest at a high rate, like 28%, and will charge you the entire interest amount if you are even late on one payment. So there's a huge incentive not to default on the loan.

(Also note that credit card transfers usually have a fee of 2-3%, but I don't think that's what you're asking about).

But yes, there may be cases where they will not lower the price and there's no alternative supply (meaning you can't get it cheaper somewhere else). The retailer either bakes into their profit margin or uses it as a sales enticement to get you to buy when you might not if you had to pay full price upfront. Or, they use the interest charges from other customers that don't pay on time to cover the savings you get.

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    This would be a good answer regarding a store offering financing, however, the question is about a credit card offering a promotional intro rate, which should apply to any purchase.
    – TTT
    Feb 27 at 2:01

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