Ah, zero percent credit cards.  Imagine a world where banks would issue you credit cards with high limits and no requirements to pay any interest.  You could charge to your heart’s delight, pay the monthly minimum, and pay nothing extra in interest charges.

Sound too good to be true?  It probably is.  That said, there are a few ways to use zero percent credit cards wisely as part of any financial management program.

What are zero percent credit cards?

Zero percent credit cards are just that:  They charge zero interest.  But if you think about it, since banks make most of their money on interest charges, how could they manage to offer these types of rates?  The answer is, they can’t — at least not for long.  This is why most of the zero percent credit cards that banks issue offer this extremely attractive rate of only a short time, only on certain purchases and only if the user pays on time during the special rate period.  After the initial introductory period, the rates on the remaining balance often rise to an even higher level than you might find on a traditional credit card.

How can I use zero percent credit cards?

Of course, zero percent credit cards can be a useful tool for the wise and disciplined consumer.  Following are some ideas for utilizing zero percent credit cards as part of your financial management system.

- Review the Terms Carefully: In many cases, the benefits of a zero percent credit card will expire in the very short term (i.e., three to six months).  If you are sure you can pay off the balance before then (see note below), then by all means consider this option.  However, you may want to limit your use of zero percent cards to those rare opportunities where the term lasts a year or more.

- Pay Off the Balance Right Before the New Rate Kicks In: As noted above, the introductory term for most zero percent credit cards is relatively short.  After the initial grace period, the rates will go up to sometimes astronomical levels.  In some cases, you may even have to pay the higher interest rate on the entire balance.  In other words, interest will accrue at the higher rate from the start of your purchase.  If you pay off the balance early, you won’t pay that amount, but if you don’t, you’ll owe total amount, including the interest at the higher rate.  This is why it is imperative that you pay off the balance on your zero percent credit card BEFORE the higher rate kicks in.  If you will not be able to do this, then don’t use the card.

- Invest the Savings You Will Use to Pay Off the Card in a Higher Return Account: This is where the true financial wizard will achieve the most benefits from the zero percent credit card approach.  Picture this situation:  you use your zero percent credit card to purchase an item for $1,000.  Your rate will rise in six months and you plan to pay off the card right before the expiration of the six month terms.  In the meantime, you invest $1,000 of your own money in a money market account that pays 5% per year.  At the end of the six months after paying off your card you’ll have an extra $25 (your investment proceeds), the item that you wanted six months early and a debt free existence.  Sounds pretty good, doesn’t it!

Of course, the easiest way to have a “zero percent credit card” is to pay off your balance every month.  This approach will turn almost any card into an interest-free card, and keep you financially independent.