Credit with Fees and No Interest Credit Cards

What is credit with fees? There are many different types of credit out there that promise no interest but instead charge fees to borrow money. The promise of no interest can be tempting, but when you factor in those fees sometimes they can be as much as if you had agreed to an interest rate (or more in many cases).

For example, a payday loan, which lets you borrow money for a short amount of time, may not charge interest, but will charge you a fee to borrow. For example, if you borrow $1000, with a borrowing fee of $200 for 2 weeks – at the end of a year if the debt remains unpaid you would have paid $5,200 to dollars in interest to borrow $1,000.00.

Other cards, like pre-paid credit cards, carry activation fees that can get costly. Other cards will offer no interest but have annual fees that can be the equivalent of interest – so beware.

What are no interest credit cards? Well, an excellent example is furniture cards. Think of the no payment, no interest campaigns offered by Leons, The Brick, or Home Depot. The credit is funded on a card and while there may be no interest, there is almost always an “administration fee” – this fee is a part of your cost of borrowing and should be considered as interest.

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Companies offering no interest credit cards make their money by charging interest once that grace period is over, as well as charging back interest. This means that if you don’t have the cash to pay in full at the time the no interest period expires you could be subject to a large interest rate (we have seen as high as 35%). Also if you miss a payment during the no interest term, it can trigger full interest to begin accruing on your account.

No interest credit cards can work if you are able to pay down the entire balance (or at least reduce it substantially), but if you can’t, you’ll be stuck paying interest, and possibly at a higher rate than your old card. If you don’t know whether you will be able to pay off the entire balance – stay away from no interest credit cards.