Enjoy interest-free credit cards -- but carefully

0% credit cards are useful, but read the fine print with a magnifying glass

Last Update: 9:08 PM ET Jan 2, 2007

LOS ANGELES (MarketWatch) -- Holiday sales for 2006 are projected to total about $435.3 billion, according to the National Retail Federation. Most of those purchases will be via credit cards.
November and December are your hottest spending months. You are running up charges for gifts, entertainment, travel to see families, going on vacations and more. Your credit card is especially active during the week after Christmas buying up all the electronic equipment and supplies for your business at drastically reduced sale prices (after all, you want to take advantage of that special year-end tax window: buy on credit card now, take the deduction now, and pay later!).
Soon, you'll be sitting there, in stunned silence, looking at those credit card statements with balances much higher than you expected. Unfortunately, all those charges are your own. You can't blame identity theft.
So what's a good consumer to do? Reach for your trusty 0% credit card, of course.
What's nothing good for?
Interest-free credit cards are really handy offers to help you manage your finances in a variety of ways. For instance, you can use them for the short-term to avoid paying interest on your holiday purchases.
Also, interest-free loans are a wise move for larger purchases that you know you can pay off during the no-interest offer period. For instance, equipment or expansions for your business, which you'll be able to pay off from business income over the coming year; purchasing a vehicle after an accident, when you're expecting an insurance settlement in a few months; or home improvements that you know you'll be able to pay off over the nine to 15 months of the offer, from your monthly income stream.
For those who have access to safe, lucrative returns on your money, this is a great way to get some quick cash for investments. A 12-month CD at 5% could net you an easy $1,000 with no risk. Beware: If you use that money to invest in anything risky and you lose it, this could become an expensive loan.
Read the fine print
There are basically three types of 0% offers:

1. 0% on all purchases for a specified period of time. Use these offers to make new charges while you pay off your other, interest-bearing credit cards.
2. 0% on all transfers during a specified period of time. If you use this, don't make any other purchases on the card. They will be subject to the regular interest rate.
3. 0% on all transfers and purchases during a specified period of time. Look for this among your offers. This is the best offer of all.

Interest-free may be expensive
There's always a catch. To ensure that you really pay 0% for that money, or as little as possible, you're going to have to do some fine-print reading. It's apt to require a magnifying glass.
You're looking for the following information:
1. The fee charged for transfers or cash advances. They come in three flavors:

* No fee at all. Often, this will be offered by a credit card you already have; rarely will you get this from a new card solicitation.
* A percentage, up to a maximum dollar amount. They tend to range from 2% to 5% of the money drawn, with ceilings of $35 to $100.
* A percentage, with no maximum dollar amount. They tend to range from 2% to 5% of the money drawn. Without a limit, they can end up being quite expensive. After all, 5% of $20,000 is $1,000.

2. The length of time 0% is in effect on your account. When the offer has no advance fee, they'll display that prominently. When there is a fee, it's generally hidden in the fine print. You'll really have to search for this information.
The offer may end on a specific date, regardless of when you sign up, so be careful not to draw money on an offer that will run out in two or three statements. Imagine if you had to pay a 5% advance fee of $1,000 and suddenly learned the rate expires in two months because you forgot to check. That 0% card has now cost you 30% per annum.
Or the 0% may be for a specific number of months (or statements). Look for those that will run for at least nine months. Odds are, if you do a little searching, you're going to find offers for 15 months.
3. The interest rate you'll be charged if you miss a payment or you're late. Typically, those rates are in the 14% to 22% range on new card offers. Your existing cards will have rates closer to 10% or prime plus 1% to 3%. You will usually find this in the disclosure box on the back of the offer.
4. Beware! Even if you faithfully make all payments on time, the fine print may include a note that your 0% offer will end -- and the high interest rate will go into effect -- if you miss payments on other credit cards.
Don't use the card again
Once you've drawn money on a 0% card, don't use it for anything else. Put the card away where you won't accidentally pull it out and drop it into your wallet or purse.
Why? Because, unless the card provides for a 0% rate on all purchases during this offer period, you'll be charged the top rate for all your purchases.
That doesn't apply to you, you say? You pay off all the new charges as soon as you get the bill? Of course you do! But if you read the very fine print, you'll learn that the credit card company will apply all your payments to the cash advance first, not to your purchases. So, as you use your card, you'll be building up a balance of charges subject to interest.
Imagine you've drawn $15,000 on a 15-month interest-free offer. If you only run up $250 per month in charges, by the end of the year, even if you pay the $250 and $1,000 per month, you will have accumulated a balance of $3,000 at 10% to 22% (depending on the card) alongside your $3,000 balance at 0%, still good for another three months.
So, don't use these cards again once you've drawn the cash advance or transfer.
Mark your calendar
The expiration dates on these offers come up sooner than you expect, even when you have 15 months. So put reminder notes on your calendar 60 days and 30 days before it expires. Either have the money on hand to pay off the rest of the balance before the interest jumps high, or have another 0% offer handy to replace the first.
A final tip
If you don't use the offers coming in your mail, don't just throw them in the trash. Your trash is fair game for anyone who wants to root around in your trashcan. The courts have confirmed this repeatedly.
Be sure to shred them completely. Purchase a cross-cut shredder you can keep handy to shred all offers and catalogs with your name and credit line information in them. End of Story
Eva Rosenberg is the founder of TaxMama.com and an enrolled agent licensed to represent taxpayers before the IRS. She is the author of the book "Small Business Taxes Made Easy."


By Eva Rosenberg, MarketWatch