How Do Banks Make Money When They Offer 0% APR Cards?

Posted: Apr 01, 2019 9:31 AM
How Do Banks Make Money When They Offer 0% APR Cards?

Source: AP Photo/Elise Amendola

Those who borrow from a bank understand that the bank is making money off of the arrangement. This is the basic idea behind interest rates—if you need money now and don’t have any, the bank will lend it to you, but you’ll pay back in excess of what you initially borrowed. If this is the happy status quo, then what is a bank doing when it advertises 0.00% APR credit cards, loans, or lines of credit? Is it giving away “free money” in the form of an interest-free loan, or are there hidden conditions designed to catch borrowers unaware?

The reality is that even when banks offer 0.00% APR financial products, they’re still able to stay “in the black” in creative ways. That doesn’t mean prospective customers need to be suspicious, however. For the right person a 0.00% APR credit card is a purposeful, beneficial tool that delivers on its lofty promises, while also adding to the bank’s bottom line in various subtle ways.

Your Membership Is Meaningful

First and foremost, any promotion that a bank offers has one primary purpose: to entice new customers. With so many imaginative credit cards and deals out there, that big fat zero next to the APR percentage symbol is a powerfully distracting visual. Banks know that among the factors determining which card a customer chooses, the interest rate is among the most important for any final choice, with the ability to earn rewards, obtain introductory bonuses, and access luxurious perks trailing behind.

Especially for consumers who regularly carry a balance or are anticipating a large incoming expense, gaining shelter from interest rates is a blessing. It doesn’t matter that applicants’ intentions are usually to take advantage of the limited-time low-interest and then cancel. Banks are betting on the fact that they’ll like the card and just keep using it, even when the post-promotional rate has returned to normal. Many cards also come with an annual fee, which is worth paying for those who have large balances to transfer, but also represent more money going into bank coffers.

What They Don’t Tell You

Those borrowing at 0.00% from the bank bring their inherent value as a customer to the organization, and may be paying annual fees as well, but there are less transparent ways they often get caught with their wallet open. The primary way banks profit from 0.00% APR deals is when borrowers can’t pay off their full balance, or neglect to transfer it before the lucrative promotion is over. When a 0.00% promotion usually concludes, the interest rate on any remaining transferred balances generally rises to around 20.00-24.00%.

It’s possible to escape this occurrence by paying your balance in full before this happens, or by transferring your balance to a different bank, but you can also have your 0.00% promotional rate cancelled mid-promo for failing to pay a monthly minimum balance. This universal caveat is dangerous for those cardholders who don’t set up automatic payments or who aren’t confident in their ability to pay consistently. It goes unadvertised and is often hard to spot in the fine print, but this is why it’s even more important to sit down and determine if you have the financial wherewithal to handle a 0.00% promotion…and any hidden trappings involved.

Another idea to be aware of for 0.00% balance transfer deals specifically, is that you shouldn’t ever use these cards to also purchase everyday items if you plan on carrying the purchase balance alongside the transferred balance. In many countries, financial regulators impose rules that automatically distribute payments to balances with higher rates or those that are larger. While you might intend for your payment to be split between your balances favorably, if there’s a purchase balance it may take precedence and cause a payment towards your transferred balance to be missed or split in a detrimental way.

At the end of a promotion, this idea could jeopardize the payment intended to wipe out your balance before the clock runs out, but even if you navigate your 0.00% deal expertly there are some elements designed to ensure that in the worst-case scenario banks break even. One common notion is the transfer fee, which charges a 1.00%-3.00% fee on the total amount of the transferred balance. While it doesn’t feel like you’re getting charged (the fee is added to your balance), you certainly are, and this must also be factored in from the outset.

Banks Are A Business, Don’t Forget it

Banks are heavily regulated and observed, so when they offer a 0.00% credit card, it’s for real. However, it’s up to you to determine your eligibility and whether you can see a 0.00% deal through to the end without becoming too greedy or negligent. It can be tempting to use these cards to add to your transferred balance or to forget about the balance since it doesn’t accrue interest, but it’s not the bank’s job to warn you about the fees they’ll assess should this occur.

If you’re managing a large balance at a high interest rate or are planning for a hefty upcoming expenditure, it’s sensible to make the most of a 0.00% deal—you’re a suitable candidate. Simply take advantage from a position of knowledge rather than eagerness, and you’ll be prepared to complete your lucrative 0.00% APR deal as the bank’s “worst case borrower” rather than their cash cow.