Are Zero Percent Bank Offers Too Good to Be True?

We have all heard the adage, “If it sounds too good to be true, it probably is.” That old bit of folk wisdom is rooted in sound financial principle. With very few exceptions, deals that sound too good should be avoided like the plague.

Let’s consider an example that shows up regularly in your mailbox. There continually appear come-ons, letters, and checks suggesting that you should borrow money at zero percent interest for a period of time. By offering what seems to be free money, credit card companies appear to be proffering a gift. Can it be?

A fine place to start is by remembering that banks and credit card companies are in business to make money, not give it away. Any bank that lends money for free on a continuous basis would soon be bankrupt. Furthermore, it would violate a bank’s fiduciary duty to its shareholders to make gifts to customers if they were not doing so in the interest of making money in the long run.

So why the zero percent offers? First, they are invariably not really zero percent at all. Look at the fine print. Most of those deals involve a one-time fee of between 2 and 5 percent. At the risk of stating the obvious, if you pay a 4 percent fee to borrow money for a year, the loan is not free.

Even beyond that, there is another catch to these offers. Once a significant amount has been borrowed at zero percent, any further indebtedness is incurred at the usual contractual interest rate. And, as you may have noticed, your credit card’s normal interest rate is painfully high.

Now comes the ploy: When you send a monthly sum to pay off part of the debt, your money is credited against the portion of debt designated as zero interest. In the meantime, you have extinguished none of the debt carrying the normal interest rate. All of a sudden, it has become much harder to pay off the expensive credit card debt.

It is a widely known salesman’s trick to offer a little something free to get you to buy more at a high price. This tactic is pretty harmless in most cases. Indeed, a free sample at the grocer’s may make the shopping trip more fun. But when the free item has some hint of being addictive, it becomes a sinister maneuver. Folks who have trouble controlling spending or managing debt are quite vulnerable to an apparent freebie. And, in the long run, all but the most prudent will come out behind.

There are wiser ways to borrow money. Besides, avoiding most debt entirely is probably the more prudent path for most people. Shakespeare famously implored us to “neither a borrower nor a lender be.” We can only guess what he would have said about those zero percent checks clogging the mailbox.