But having easy access to credit also means it’s easy to overspend — something you just couldn’t do when paying with cash. You can end up with a lot of debt that can take years or even decades to pay off.
One kind of credit card may be more likely to set you up for success, and this type of card can even help you save money on interest if you're struggling with debt already.
Balance transfer credit cards, which can also be called ‘0 per cent APR credit cards’, actually let you avoid paying interest altogether for a limited time.
Surveys indicate that people on average currently accumulate about Dh10,000 in debt on their credit cards. Here we analyse a simple strategy where you can pay off Dh10,000 in debt with a simple strategy:
Stop paying interest for up to 18 months by taking advantage of 0 per cent balance transfer offers. This will help you pay off a Dh10,000 loan 1-2 years faster and save you thousands in interest.
Pay about Dh6,000 less in interest via a balance transfer card’s introductory offer
How does an 18 month 0 per cent deal save you so much in interest? Here’s an example: if you owed Dh10,000 in credit card debt and paid Dh250 a month — 60 per cent of your payment is going towards paying your credit card interest!
To make matters worse, that interest keeps getting added (compounded) on so you are paying interest on your interest! For example, if you owed Dh10,000 credit card debt and paid Dh250 a month:
• Dh150 of your Dh250 payment would go towards paying interest.
• Only Dh100 (40 per cent) goes towards paying down the Dh10,000 principal amount (original borrowed amount).
At this rate, it would take 62 months to pay off your debt, and it would cost you a Dh5,386 in interest!
So apply for a credit card with a 0 per cent introductory balance transfer APR (annual percentage rate, which is expressed as an interest rate) offer, and transfer all your credit card debt to the new card.
By eliminating interest for 18 months, having your entire monthly payment go to the principal, you can pay off the entire Dh10,000 debt years faster and save thousands in interest, as indicated above.
How do I choose the best-suited 0 per cent APR credit card?
Whether you want to pay down a large purchase without interest or save money by consolidating high interest debt at 0 per cent APR, it's crucial to make sure you wind up with a new credit card that offers the perks you want.
Here's everything you need to look for as you decide.
• 0 per cent APR offers that give you the time you need
If you want to pay off a large purchase over time or consolidate debt at 0 per cent APR, you'll need to make sure you have enough time to pay off your debt entirely.
Definitely compare 0 per cent APR offers to see which ones give you plenty of time to accomplish your goal. If you don't, you'll wind up paying off debt at the standard variable APR, which will likely be very high.
• Don't pick a card that might entice you to overspend
If you're really trying to pay off debt, stay away from cards that offer big sign-up bonuses within the first few months.
You should use your balance transfer credit card to save money on interest, but don't use it for everyday spending.
• Make sure to take fees into account
Most 0 per cent APR credit cards don't charge an annual fee, but you should still compare balance transfer fees and other potential fees you may be charged such as late fees and over-limit fees.
• Compare rewards programs
Finally, make sure you check out rewards programs if you want to rack up points on a large purchase.
Some cards only let you redeem rewards for gift cards or cash back, whereas others let you cash in points for travel or transfers to airline and hotel partners.
Compare rewards programs ahead of time so you earn the type of rewards you want the most.
Deferred Financing vs. Waived Interest: Understanding the difference is key
At first glance, it might seem you can’t go wrong with a card with a promotional 0 per cent balance transfer APR. However, knowing the difference between deferred financing and waived interest could end up being worth hundreds of dirhams.
Deferred interest is most likely the offer you come across directly from a store. For instance, you can currently take advantage of 0 per cent deferred interest financing on certain purchases for 6 months on purchases costing under Dh500.
The interest accrues during the promo period, but you don’t pay the interest unless you haven’t paid off the balance by the end of the promotional period. Further, if any of your payments are late, you could also be billed all of the interest that accrued since you made the purchase.
With deferred interest offers, you will be assessed all of the accrued interest if you don’t pay your balance in full by the end of the offer.
Waived interest, on the other hand, is commonly offered by standard credit cards. If your credit card offers 0 per cent interest that is waived, you are typically able to take advantage of the promotional period without accruing interest.
If for some reason, you don’t pay your balance in full when the promotional period ends, you just start to pay interest on your balance according to the card’s APR at the moment.
When interest is deferred, interest is still accruing. If you don’t pay your balance in full, even if you just have Dh10 left on your balance, you get charged for all the interest during the period.
But if the interest is waived, no interest gets calculated until the promotional period is over. Then interest will start being added based on the balance you have left.
In either event, it’s best to pay your balance off completely within the promotional period, but if there’s any chance at all that you won’t be able to pay your balance down during the designated period, it’s best to make sure your interest is waived rather than deferred.
Check your credit card conditions and especially take note of terms such as “financing” and “deferred interest” if you aren’t sure.
Keep watch for ‘Penalty APR’, but what is it?
In addition to APRs, there is also a Penalty APR to consider when you use your credit card. Not all credit cards charge a Penalty APR, but if they do, it’s important to understand how it can affect your payments.
Penalty or default APRs vary and have changed with different countries. For consumer or non-business credit cards, a penalty APR can result in an increase to your interest rate if you miss a payment, make a late payment, or exceed your credit limit.
For the most part, it means a significantly higher interest rate (often double what you start with) on new purchases. However, if your payments become 60 days late, the penalty APR can apply to your existing balance as well.
However, if you end up in this situation, more often than not you aren’t permanently stuck with the penalty APR.
In most instances, once your rate is increased the card issuer must reconsider the penalty APR in six months and in most instances your APR will return to the non-penalty APR after making the next six consecutive payments on time.
