Some credit cards offer very low interest rates on which they can not hope to make a profit. Card holders can take advantage of this, although it is important that they understand why they do this.
Credit card companies offer low interest rates, sometimes as low as zero per cent – in effect free credit – but only for an introductory period of a few months, which can be as little as three months or as long as eighteen. At the end of the low interest period they will increase the interest rate, often to a rate that is slightly higher than the market rate.
There are low interest cards that offer an interest rate that is low for a long or indefinite period, but these tend to have a higher interest rate than the introductory offers and are designed so that they are profitable to the card company.
Credit cards that offer very low interest rates only tend to do it on one type of balance. This is where a credit card differentiates between various types of balances and how they arose. There are three main types, spending, credit card balance transfers and cash advances. It will often be the case that if a credit card balance is offered a low interest rate then the spending on the card will be charged at a separate, and considerably higher, interest rate. This interest rate will also tend to be charged for longer as any repayments will be taken off the lowest interest balance first. This means that until the balance that arose from the balance transfer is paid off then the higher interest balance that arises from spending will be intact.
There are also balance transfer fees, but these tend to cover the administrative costs, and they are charged as a proportion of the balance that is transferred over, usually between 1% and 2% of the balance.
The way to take advantage of these very low interest rates is to go from one credit card to another taking advantage of the low introductory rates. However this approach needs a certain amount of discipline and a lot of good planning. The credit cards need to be changed in good time before the introductory interest rate runs out. It is also important to cancel credit cards in good time and not to spend on the credit card.
