The interest rate on credit cards is generally very high. It’s not uncommon for rates to be 17% or higher. That’s why the general rule of thumb is that you shouldn’t ever carry a credit card balance. Instead, you should use your card to earn rewards and then pay off the bill in full when it comes due. This way, you’ll get the benefit of the card but won’t waste money on interest.
Of course, there are often exceptions to rules. And there’s one particular situation when carrying a credit card balance can make a lot of sense. Here’s what it is.
Carrying a credit card balance could pay off in these circumstances
Carrying a credit card balance could actually be a smart financial move and could save you money. For example, it can be beneficial if you need to make a big purchase and you qualify for a 0% APR credit card that you can use to make that purchase. Then, you can pay off the balance over several months without paying any interest.
A 0% APR credit card is a credit card that charges a 0% promotional rate on purchases for a limited time. Usually, this type of offer is available to new cardholders and it allows those who sign up for a card to take around 12 months to repay their balance due without owing interest charges.
A 0% card is one of the very few options available to finance a purchase over time with no interest. And, depending on the card, you may even be able to earn rewards or a sign-up bonus for making your purchase. You’ll benefit by saving on the interest cost of your purchase and by getting something back for using the card.
Of course, there are some caveats to be aware of before you decide to use a 0% APR credit card to finance a purchase. First and foremost, you’re going to have only a limited period of time when the 0% rate is in effect. After that time period expires, you’ll have debt at a high interest rate that could be difficult to pay back.
So, before you use this strategy, you need to make absolutely sure that you can fully repay the borrowed amount during the 0% promotional period. Don’t count on being able to transfer the balance at the end of that time, since your income or credit situation may change and that may not always be possible.
Calculate how much it would cost to make the monthly payments to be debt free by the time the promotional rate ends and make sure this fits comfortably into your budget. If it doesn’t, consider an alternative such as a personal loan to finance the purchase. A personal loan could come with a lower rate than standard credit card interest and a longer repayment time.
You also need to be aware that if your large purchase uses more than 30% of the credit line on the card, this could hurt your credit utilization ratio and impact your credit score. You may decide that taking the short-term hit is worth it to be able to finance your purchase at 0%, but you do need to weigh the downside risk.
Ultimately, if you don’t mind a temporary hit to your credit score and you’re confident you’ll repay the balance before paying interest, there’s little reason not to take advantage of the chance to secure 0% financing for a big purchase you need to make but can’t afford to cover all at once.