If you have some savings then you may want to hold on to them. This is natural as it takes effort to save up for things and so you may not feel that you want to part with that money. You may feel that you would rather find an alternative way to afford things. If you have the option of applying for a zero-interest credit card then you may think that this will be a better idea. You could be right but you need to consider the risks that you are taking before you sign up.
Risks of a zero-interest credit card
Having a zero-interest credit card means that you will be able to buy things with the card and not worry about paying for them for a while. The card works by giving you a certain period of time where you will not need to pay interest on anything that you spend on the card. You will still have to repay a minimum but until the zero-interest period is over there will be no interest charged on the outstanding balance. The zero-interest period will end though – possibly after a few months or a year. After this interest will be charged on any outstanding balance and this could be high. Often this type of card has higher interest than a standard one. This means that if you do not have enough money to repay the outstanding balance then you will have to pay a lot of money in interest.
There is always a risk with a credit card that you will use it to buy more than you need. There will be a chunk of money available to you and it can be easy to forget that it has to be repaid. Therefore, it can be easy to overspend and then find that you do not have the money to repay what you have spent.
If you are getting a card for a specific purpose; to buy something rather than use your savings, then this should hopefully mean that you will only use it for this purpose and nothing else. You do need to be confident though, that you will still have the money available to repay the full balance when you need to. It may be that as you have the money in your savings account you will know that it will be available, however, you will still need to resist the urge to spend that money.
Benefits of a zero-interest credit card
There are financial benefits to using this card rather than your savings as long as you repay the card before the interest starts being charged. You will be able to keep the money in your savings account earning interest. You may even be able to add to those savings and earn even more interest and then when you pay off the card you will still have some savings.
How much you benefit will depend on the interest rates. If you can earn a lot of interest on your savings during the zero-interest period of the card then it will be well worth it, however, if you cannot earn very much then it will not be worth it. It depends what sort of interest rate you are getting. If your money is tied up for a fixed period or you have to give notice to withdraw it, then you are more likely to be able to get higher interest than if it is in an account where you can get instant access to it. Do be careful though, as if it is tied up you will need to ensure that you can get to it when you need it to pay off the card balance.
How to decide
It is worth doing the calculations to see how much you could gain financially from having money in a savings account and using a zero-interest card. You need to then weigh this against the risk of having the card. You will know whether you are the sort of person that will be sensible with the card and only use it for the purpose that you got it for. You will also need to check when the interest period starts and make sure it is paid off in full before then so you have to trust that you will remember to do this as well.
There are always risks with borrowing money but you can decide what the risk is for you. You might feel that you are not a high risk because you are sensible and have a good income or you may worry that you might use the card for buying all sorts of things and end up with not having enough money to repay it. Think about which will apply to you and then you can make the right decision.
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