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Risks vs. Rewards of "Introductory" Credit Card Offers
Many credit card companies will offer incentives like lower interest rates and fees to entice consumers to apply for a new credit card. These introductory credit card offers can indeed be beneficial, but it’s important to be aware of the potential risks involved.
Introductory Offer #1: Low interest rates on purchases
Explanation: The credit card issuer may offer a very low introductory rate, sometimes even 0%, on purchases that are made with the credit card.
Rewards: Obviously, a lower interest rate is beneficial for consumers because it allows them to save money. Obtaining a card with a low introductory purchase APR may be a wise strategy if you are planning to make a large purchase. That way, you can be sure that your payments are going directly towards your debt rather than being used to pay off interest.
Risks: This type of offer can look great on the surface, but there may also be some risks involved. First of all, many introductory rates are offered on a conditional basis. If the cardholder misses a payment or is late with a payment, the regular interest rate may be applied to the debt, and this can translate into significant unwanted charges.
In addition, it’s possible that these offers could encourage you to develop irresponsible spending habits. Because little or no interest is being charged, it’s easy to get into the habit of not paying the balance off each month, but the problems with this practice will quickly become apparent when the regular rate kicks in.
Finally, any balance remaining on your card after the introductory rate expires will usually be subject to the regular rate. So, even though you bought that $500 outfit during the introductory term, you will usually be charged the much higher interest rate on the debt if it hasn’t been paid in full.
Introductory Offer #2: Low interest rates on balance transfers
Explanation: The credit card company offers the consumer the opportunity to transfer debt from another card onto a new card. A lower interest rate is charged.
Rewards: For very disciplined individuals, transferring high rate debt to a card offering a lower rate can be a wise strategy. The debt can be paid off more quickly because less money is going towards interest.
Risks: The risks involved with using this type of debt repayment strategy are readily apparent. First, unless most or all of the balance is paid off before the introductory term expires, the debt will once again be subject to high interest charges.
As previously stated, individuals must be disciplined. If the cardholder begins to use the card for purchases and cash advances, it’s likely that it will become a tool to accumulate more debt rather than pay it off.
Many cards will also charge a fee that is equal to a percentage of the transferred amount. Therefore, if the balance is not paid, these fees can effectively increase the amount you will owe at the end of the introductory term.
Introductory Offer #3: Free Gifts and/or Bonus Points
Explanation: A gift, such as a piece of clothing or a gift certificate is offered to those who are willing to sign up for the card. If it is a rewards card, the first card purchase may result in bonus points being awarded.
Rewards: The rewards of this type of introductory offer are self-explanatory. The consumer essentially gets something for nothing, and they have the opportunity to earn a large number of rewards points quickly.
Risks: Some consumers sign up for more cards than they will ever need or use simply to get the free gift. There are several risks associated with this practice. First, too many credit cards increases the potential to accrue serious and significant debt loads. Secondly, constantly applying for more credit can adversely affect the individual’s credit score, which can compromise their ability to obtain approval for loans and mortgages.
Introductory Offer #4: No Annual Fee for the First Year
Explanation: Card issuers often waive the yearly fee for carrying the card for a period of one year.
Rewards: Obviously, cardholders can save money. In addition, they will enjoy the additional benefits and perks often associated with cards that have a yearly fee.
Risks: This is not exactly a risk, but one downside is that these introductory offers usually only apply for a limited period of time, and so the individual will be stuck with a fee every year after the first that they decide to keep the card. There are, however, some risks as well, particularly for those who intend to use the card for a single year and then cancel it to avoid annual fees.
First, if it is a rewards card and the individual has not accumulated enough points for a reward, they run the risk of losing all earned points when they cancel.
Secondly, if there is a balance remaining at the end of the year, the account will be quite difficult or impossible to close, and so the cardholder will be stuck paying the annual fee.
Finally, those who frequently sign up for cards offering an introductory no-fee period and then cancel them at the end of the year can end up damaging their credit score.
About the Author:
Paul Basco Provides Expert opinions and reviews to help you Compare and Apply for a Credit Card Offers online. At GettintingaCreditCard.com, we offer credit cards for bad credit, low apr credit cards, instant approval credit cards and much more.
This article may be reprinted in accordance with the GettingaCreditCard.com Reprint Requirements
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