One New York City man thought he’d gamed the system when he bought an $11,000 engagement ring using a 0% interest credit card offer from Bank of America.
With $25,000 sitting in a high-yield savings account earning 4%, Nick figured he could carry the balance for two months, earn a little interest, and make the most of the promo window.
“I have no intention of putting anything else on the credit card,” he explained on The Ramsey Show. “It’s just a cash outflow question as far as managing my monthly payment.”
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But personal finance guru Dave Ramsey wasn’t impressed.
“Write a check today and pay off the card,” he said bluntly. “You did a sweet, good thing in a dumb, bad way.”
Don’t play games with debt
Ramsey’s point? The math simply doesn’t work out. The interest earned over 60 days would barely cover a fast-food lunch.
“You made enough to buy a biscuit,” Ramsey quipped. “You don’t beat Bank of America. The only way to beat them is to stay away.”
Nick’s hesitation came from the fact that dipping below $25,000 in his savings account would drop his interest rate from 4% to under 1%. But as Ramsey calculated, 4% of $10,000 is just $400 a year, less than $40 a month. “You can’t buy a pizza [with that],” he added.
“You’ve spent hours screwing with this in your mind,” Ramsey explained. “It paid you about $1.16 an hour.”
The Ramsey Show co-host John Delony chimed in with a dose of real-world forecasting. Once the wedding planning starts there will be unexpected expenses, some of which may require cash deposits, and it’ll be all too easy to “float” just one more month. That’s exactly how banks make their money, by getting people comfortable with debt.
At the end of the call, Ramsey wasn’t sure if Nick was fully convinced.
“You don’t want to put that ring on her finger and say, ‘Thank you, Bank of America,’" Ramsey said. “That’s gross.”
Nick may have had good intentions, but Ramsey’s message was clear, when it comes to major life moments, avoid playing games with debt — no matter how sweet the introductory offer sounds.
Read more: Want an extra $1,300,000 when you retire? Dave Ramsey says this 7-step plan ‘works every single time’ to kill debt, get rich in America — and that ‘anyone’ can do it
Hidden risks with 0% APR
While 0% APR (annual percentage rate) offers can seem appealing, they can come with hidden risks.
Many of these offers are deferred interest promotions. This means that if the balance isn’t paid in full by the end of the promotional period, interest is charged retroactively from the purchase date.
So, let’s say you make a $4,000 purchase on such a card and only pay $2,000 of it off. Consider that average APR on retail store credit cards, for example, is close to 30%, that’s $50 a month simply in interest. You could end up owing hundreds of dollars in interest over time.
Relying on 0% APR offers can also encourage overspending. The temptation of ‘free’ financing might lead consumers to make purchases they can’t afford, thinking they have more time to pay. Without a clear repayment plan, this can result in accumulating debt.
To be safe, it’s critical to read the fine print of any credit card offer.
Make sure you understand whether the offer is truly 0% APR or if it’s a deferred interest deal. Have a solid repayment plan in mind to pay off the balance before the promotional period ends.
And if you can’t commit to paying off the full balance in time, it might be better to rethink the purchase or consider other financing options.
In Nick’s case, Ramsey advised paying off the credit card balance immediately and cutting up the card to avoid future temptations. It’s a reminder that even ‘free’ financing can come with hidden costs.
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This article provides information only and should not be construed as advice. It is provided without warranty of any kind.
