The conventional wisdom of our grandparents' era was rooted in a simple financial philosophy: save before you buy and avoid credit at all costs. Such an old-fashioned approach stands in sharp contrast to contemporary behaviour, where an escalating sort of financial hedonism has left Australia with one of the highest levels of household debt in the world – a whopping 119.9% of GDP in September 2022 (we were beaten only by Macau and Switzerland).
Whether it's credit card switches, car loans or consumer goods like appliances bought on interest-free plans, we can't seem to stop borrowing. But before you toast your latest purchase with a round of drinks charged to your no-interest credit card, take a leaf from your grandparents' book.
All financial loans are carefully crafted with the goal of reaping profit from you, not helping you get ahead in the world. So how do lenders pursue that overriding agenda using a 0% interest strategy?
Money comparison website Mozo currently features almost 100 0% credit card balance transfer deals. Some of them may even be a smart move if you proceed with caution.
A better profit margin is usually a seller's main motivation for offering low or no interest deals. With zero interest deals, the sticker price may be higher to begin with.
Businesses generally aren't in the habit of providing something for nothing – so do your research and stay smart.
Conditional loans can lock you into buying at a higher price. For example, a car dealer may only offer you a 0% loan if you agree to paying full price for the vehicle. But you might find you get a better deal, and pay less overall, with a loan that comes with interest, and retaining negotiating power on the overall purchase price.
Real cost of a loan
Because of clever marketing and spin, the real cost of a loan may not always be obvious at first glance. Don't forget you may be up for additional costs such as an application fee, administration fees, account fees and charges for missed repayments.
In the excitement of the moment it's easy to forget that life doesn't always go to plan, particularly when it comes to money. That's important because economic ups and downs can affect your ability to repay the loan in the agreed time. If you're unable to do so, the punishing revert rate will kick in after the introductory period – far more than 0%. Interest-free periods are always limited, so that may be just what the seller is hoping for.
- Shop around before locking in a 0% finance deal. Ask yourself what price those goods would be for cash, how negotiable would that be, how badly do you need those items – and will they be obsolete before you've even paid them off?
- Ask yourself if it might be cheaper to make the purchase using an alternative strategy such as cash, a low-interest loan or refinancing.
- Read the fine print and always do the math before entering any formal agreement.
- Use loan calculators (the government's Moneysmart website has some good ones) to compare products.
- Remember, sometimes low interest loans can work out cheaper than 0% deals.
Australia's credit and charge card debt stands at around $16.8 billion in September 2022. Clearly, credit cards play a significant part in the debt profile of the average Australian consumer.
The 0% credit card debt transfer deals currently on the Mozo website range from a balance transfer period of 6 months to 36 months.
What to watch out for
- Interest rates: One key trap with credit card debt is the purchase interest rate on the card. These can vary greatly so do your research before you sign up.
- Essentially, the 0% deal will only apply to the debt you transfer. If you use the new card for other purchases or cash advances, you'll be charged interest at whatever that card's standard interest rate is. That can be up to 25%.
- Revert rate for balance transfers: Be aware that once the balance transfer offer period has expired, any remaining debt will accrue interest at the card's revert rate, which currently ranges from 8.99% to 25.99% – often as bad as the card you transferred from.
- Hidden fees: Check hidden charges like the transfer fee, which can be as high as 3% of the amount you're transferring (if you're transferring a few thousand dollars, that can deliver a nasty sting). Also, check the card's annual fee, any admin fees and late payment fees.
If you have a credit card debt of $10,000 with a current interest rate of 16%, you could save about $880 in interest over the next 12 months (taking the reduction of the loan amount over time into account) by transferring the debt to a card with a 0% transfer rate for 12 months and no fee.
Make sure you change to a card where the interest rate on new purchases and the revert interest rate after the initial 0% period are both lower than the interest rate you were previously paying.
Stock images: Getty, unless otherwise stated.