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The lure of 0% interest–Not

Chris Farrell Aug 1, 2011

**Question: **So, I know the banks are feeling the financial recovery when they start making unsolicited credit offers again. My credit card has now sent me (twice) an offer for a 0% APR for a year on balance transfers, AND 0% on any purchases made on that credit card for the year after my balance transfer.

I don’t need this – I don’t carry balances on any credit cards and I don’t have car payments or a mortgage. I am but a lowly grad student, but I live and spend like one and get a stipend, and I have come across some money through two unfortunate circumstances. So I have enough to pay my student loans when I graduate and to hold me for a while in case of emergency.

My question, then, is: should I transfer some small balance and then use the 0% APR for a free loan, which I could invest somewhere safe, pay back in a year, and make a bit of interest for myself? I could also use some to fund a Kiva loan to earn some free Karma, if not interest. My main concern is how this would affect my credit score. Would carrying a balance, even if it’s at 0% APR, hurt my credit? Robert, Princeton, NJ

Answer: As far as your main concern goes, your credit score will be fine so long as you keep making your monthly payments on time. You should also keep your credit card “utilization rate” down. That jargon-laden term is your total credit card balances divided by your total credit card limits. A standard recommendation when it comes to credit scores is to keep the utilization rate no more than 30% to 35%. (Of course, paying off the balance in full like you do is best.) .

But (you knew that was coming, didn’t you?) I’m against this strategy as a general rule.

For one thing, it’s tough to get much of an interest rate on savings these days. It really isn’t worth the maneuver unless you take greater risks with the money to reach for a higher yield. Of course, the risk taking could backfire and you could end up with a loss.

For another, the 0% APR isn’t guaranteed. There are typically rules to follow, such as no late payments. Make a mistake and the interest rate on the card will jump and the strategy falls apart.

Now, the penalties for pursuing your idea are small considering your good money habits. Nevertheless, I’m against borrowing when you don’t have to take out a loan. Yes, a 0% loan can be a smart move, but I would only consider it when you face the need to borrow.

If you want to send money to Kiva or another microlender I’d do it out of savings, not out of borrowed money.

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