There is a long list of different types of credit cards available. And each one of these offers different benefits to the holder of the card. Today I want to answer a question – what is a purchase credit card?
These are also often called – 0% purchase credit cards. As you will keep reading the article below you will realise exactly why 0% is added to the name.
It is important to understand what exactly is a purchase credit card, how these work in real life. I will cover these points below as well as add my view on what the benefits and disadvantages these products have.
I will finish the article by covering ways how to choose the best purchase credit card and what options you have after the interest free period comes to an end.
what is a purchase credit card?
A 0% interest purchase credit card is a type of credit card that offers a promotional period with no interest charged on purchases made during that period. This promotional period can range from a few months to more than a year. This will depend on the credit card issuer.
Actually, doing a bit of a research – the longest interest free period I managed to find that is currently on the market is 23 months. This is nearly 2 years and is offered by NatWest bank.
You have to however be careful with these products as not all transactions will be covered by 0% interest. In most instances credit card issuers will exclude cash withdrawals, purchases abroad or cash transfers.
You should be able to use your card for any of the above. I would however recommend making sure that you can clear these transactions as interest will be applied to these instantly in most cases.
Before doing anything other than a simple big item purchase on this card – read the full list of exclusions from your credit card provider. You don’t want to end up paying silly high interest rates for misinterpreting the conditions of the product.
how do purchase credit cards work?
0% interest purchase credit cards work by offering a promotional period during which no interest is charged on purchases made using the card. As mentioned above – this can be as long as 2 years from the moment you take your card out.
The process of using the card is fairly simple – it all start with you buying the item that you want to get. This will often be a high ticket item. The obvious thing here is – you will be paying out the item in instalments and no interest will be charged on the remaining balance.
These cards are often used by people looking to buy expensive items. An example of this can be a renovation of your home. You get to do the job of getting your home up to standard yet you can pay for this over a period of time.
Next, – you should start paying off your balance on the card. The obvious benefit here – there is no interest added to your account monthly.
It is however important to highlight that the interest free period will eventually come to an end. At this point you want to make sure you have fully repaid the amount you have borrowed.
In case if you haven’t – you will have to start paying interest on the outstanding balance that you have. This is a major watch out as the fees can quickly add up.
I will share a tip below for those who find themselves at the end of the interest free period and yet there is still a balance remaining on your card.
benefits of purchase credit cards
I will start with the pros of purchase credit cards. There is a list of benefits. It is however worth highlighting at this stage – before buying anything with your purchase card make sure you can fully repay this on time. You don’t want this card to tempt you into unmanageable levels of debt.
The first benefit on the list is obviously the no interest promotional period at the start. This can be a massive saving for those who need to buy an expensive item yet currently are having some financial issues.
This also comes with an added benefit of the fact that it can be a useful financial tool for some of us. This can help you spread the cost of a purchase into significantly smaller and way more manageable monthly payments.
These credit cards can be a useful tool for those who are in need for some major renovation works at home as an example yet can’t afford to do so in one go.
A further benefit to these cards can often be the ability for you to transfer a balance of another card and enjoy the interest free period. Before you do this – make sure that your lender allows you to use this card as a balance transfer card.
Even if you are allowed to transfer the balance – be aware, there is most likely a balance transfer fee that you will be expected to pay for this transaction.
disadvantages of purchase credit cards
When it comes to disadvantages of these cards the biggest one in my view is the actual temptation of the person having the card to spend more as there is no interest to be paid for a period of time. This is an extremely risky way of thinking as it can end up costing you a lot over the long run.
The first actual watch out of the card itself in my view is the interest rate. After looking at a could of examples online it seems to me that the average interest rate that you would be charged after the initial interest free period ends is higher than normal credit cards offer.
This is an extremely risky situation to end up in. The interest free benefit can very quickly can get wiped out due to interest payments being compounded on your debt.
A further point to be aware of – there are cards that charge you an annual feel for having access to this product. Make sure you calculate the savings and compare these to the fees you would be expected to pay.
On top of that, before applying – read the small print. Be especially careful around the fee section. There can be some additional points around you not being able to repay the debt in full before the end of the interest free period. These types of fees can erode large chunk of savings you made.
how to choose the best purchase credit card?
When it comes to choosing the right card for yourself there are a couple of points to consider. Make sure you decide which of the below are the most important for you and pay extra attention to those.
0% interest offer length
I will start with the most logical point. You are looking to buy an expensive item and spread the cost over time. The time that you are not required to pay interest has to be high priority on your agenda.
Start by understand what is it that you want to buy, how much it will cost and how quickly you can pay it back.
When applying for a card it is potentially worth adding some buffer in case things don’t go according to the plan.
interest rate after promo offer ends
Although I know that you are responsible borrower and will definitely repay the debt back in time … but what happens if things don’t go according to the plan?
This is why it is worth checking what the interest rate will look like on the other side. You should take some time to compare different lenders and make sure you get the deal that makes the most sense to you.
It might even be worth sacrificing on some other aspects but making sure you get a low interest rate after the 0% deal comes to an end.
It is worth comparing APR as well. This percentage will give you a total cost of owning a card calculated using the same borrowing figure in mind. This won’t be the exact percentage paid by everyone however give an easy to compare metric across multiple cards offered to you.
are there any fees or benefits?
Next, I would definitely review the smaller print. You want to make sure you are aware of any annual fees that need to be paid. Also, are there any fees/penalties for you not paying off the loan on time?
On top of this it is worth knowing if any of the cards offer any additional benefits. These can be the likes of cashback, loyalty points or travel perks as an example.
While these shouldn’t be your primary focus with purchase cards – you shouldn’t say no if some perks are offered.
is there any eligibility criteria in place?
Before applying for a card – read any specific criteria the lender might have for new applicants. It probably isn’t worth damaging your credit score by applying for a card where the lender expects an income that is significantly higher than what you are making currently.
There might be other criteria so definitely worth reading the T&Cs.
There are web sites that will even do a Pre-Approval checks for you. You must make sure to fill in all the information as accurately as you can. This will be crosschecked vs your credit report. This way you can make sure you are applying for the product you are likely to be approved for.
what are the product reviews?
One last thing I would do if I was applying for a product from a lender I haven’t used before – check the reviews. Try to find reviews that are specific to the exact card you are looking to apply for. No point simply looking at the reviews of the total organisation.
When looking at the reviews I would focus more on the recent reviews. Make sure you also understand the issue. If someone is complaining about being charged interest when they went over the limit of the card – the fault is more on them for not reading the terms rather than the lender.
Learn to filter useful reviews from a bunch of noise that doesn’t add any value.
what to do at the end of the 0% interest period?
First thing first – I hope you never need the advice that you can find in this paragraph. Paying debt off has to always be the top priority for anyone who takes a loan out.
The moment your 0% interest period comes to an end there are several options for you to take.
The best option you have – pay the remainder of the balance off and forget about this purchase altogether. This is obviously the ideal case scenario. If this is not an option next steps might be of help to you.
The most important step is to never stop repaying the minimum required amount. This is the worst thing you can do to yourself. Not only you will have interest accumulating on a larger sum but you will also likely going to be hit with a late fee. These can be rather large sums of money. This will also likely damage your credit score.
It is also worth reaching out to the lender and explaining your situation. Be honest and open with them. There might be ways they can help you by either reducing the interest rate or coming up with a different repayment plan.
A balance transfer card is the option you should explore next. These cards give you an interest free period. You will however most likely have to pay a transfer fee.
If your credit score isn’t good enough and you can’t get another card – is there a different type of loan you could get to cover the balance?
The only loans you should consider are the ones with lower interest rate. This way you will at least be able to reduce the amount of interest you will overpay while clearing the balance.
summary
Purchase credit cards can be a helpful tool for those in need of an emergency large purchase. It is however worth asking yourself – is the item I am looking to buy actually needed right now?
You should always try to live within your means and buy only things you can actually afford to.
If purchase card is something you decide you need then make sure to do your research to get the best product to match your needs. Be aware of all the fees and time periods that will apply to you.
While it is great to know that there are options when the interest free period comes to an end – you always have to make sure you plan to clear the debt within the interest free period. Ideally you clear it well ahead of this.