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Saturday, October 07, 2006

The Truth About 0 Interest Rate Credit Cards

This article shows you how banks divide the month's repayment in their own interest by allocating various levels predicated on varying interest rates, so that users of 0 interest rate credit cards will invariably be punished, whatever action they may take. This article also shows the reason it is essential to completely replace the credit card when the opening 0 interest rate credit card time comes to an end.

A leading financial provider recently started a TV campaign which homes in on the horrible fact that a lot of card issuers designate peoples' usage of their cards into different groups then associated a different charging rate to each. Such people hierarchies were worked out using the spending of typical credit card users. Such people include users of 0 interest rate credit cards.

If you go by the advert, a lot of credit card issuers expect that the card holder will start by making a balance transfer for a period of 39 weeks. This will be set at 0 interest. The card owner will then make a new purchase with this new credit card which will on average draw a rate of around fifteen per cent.

The credit card user may typically also deploy the 0 interest rate credit card for getting some ready cash. the interest rate for withdrawing cash is higher than the interest rate for purchases, and this is on average between 17 percent and 19 per cent but which could be as high as 23 per cent or over.

Here's where the hierarchy strategy begins. When it comes to the monthly payment, the 0 interest rate credit card card issuer will put the less expensive transactions first when the time comes to make the minimum payment, or whatever level of repayment has been decided by the card user.

So the costlier parts of the credit card usage - and that's usually the cash component - is effectively ignored as it racks up compounding more interest, and where all that interest will be further compounded and lumped on when interest is charged to the existing interest.

the 0 interest rate credit card user might think they are paying off their debt in a uniform way, which is an understandable assumption to make. But that is not what is happening at all. Because the credit card company will tend to put the less costly parts first in the payment order, allowing the costlier elements to burn your money away.

So the costlier parts of the account will always be last to be paid. In a case, for the nine months usage of this 0 interest rate credit card all the monthly repayments will be used to pay off the 0 percent interest portion while the more expensive components clock up the interest.

Crucially, the part that attracts interest is treated according to just how much interest it attracts, with the more expensive at the back, racking up the interest, paid off last. Last to go will be the cash component, with its massive % or whatever it is. The bitter irony here is that the longer the so-called interest free period of grace, the longer the length of time this amount is allowed to rack up the interest! Then when you add on the charge (typically 2% of transfer) that most 0 interest rate credit cards nowadays charge for making that transfer, then you know why the credit card companies are making so much money out of us.

The only credible solution is to dump the 0 interest rate credit card when the time comes and transfer the entire balance to a new card. That is the only way to do it. To do otherwise is to invite a cycle of endless debt.

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