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The Honolulu Advertiser

Posted on: Sunday, July 6, 2003

Credit cards' lifetime 0% interest rates come with catch

By Zachery Kouwe
Wall Street Journal

Two major credit-card issuers are making an offer that seems too good to be true: a 0 percent interest rate "for life" on balance transfers.

The deals, which take advantage of the lowest interest rates in 45 years, are designed to lock in customers and keep them from jumping from card to card.

For years, card companies have lured customers into transferring balances by barraging them with special introductory rate offers. When the teaser rates expire, however, customers often switch their balances to a new card with an equally compelling initial rate.

Now, two issuers — Morgan Stanley's Discover unit and J.P. Morgan Chase — are offering some customers 0 percent rates for life on balance transfers. "There are a substantial number of customers who just keep playing this game between one issuer and the other," says Rajive Johri, an official at Chase, which is hoping its lifetime guarantee will result in more lifetime customers.

An additional 10 banks or credit-card companies are promising that customers will pay interest rates of anywhere from 1.9 percent to 4.99 percent for life. In all, about a tenth of balance transfer offers on credit cards now carry lifetime guarantees, according to a June survey by Mintel's Comperemedia, an advertising research firm.

The lifetime deals, however, come with some major hitches. There's usually a severe penalty for late payments. The Discover Platinum card, for example, charges 19.99 percent interest to anyone who misses a single minimum payment and then permanently cancels the 0 percent deal. That means a customer with a $20,000 balance transfer suddenly is stuck paying $4,000 a year in finance charges. A similar penalty applies to most of the other "for life" cards.

In addition, many of the cards require that customers generate at least two new transactions a month, either purchases or cash advances. Customers are then charged a substantially higher interest rate, 13.99 percent in the case of the Discover card, on the new transactions. And customers can't simply pay off these new charges every month. Any payments made are applied first to the initial balance. That means customers may be required to pay a substantial amount of interest on their new purchases until they pay off the entire balance they transferred.

As a result, customers should try to quickly pay off the balance before they rack up any substantial new charges. Otherwise, "You end up trading low-rate debt for high-rate debt and reversing whatever it was you accomplished by doing the balance transfer in the first place," says Greg McBride, an analyst for Bankrate.com, a financial Web site.

Still, a lifetime guarantee can make sense for a disciplined customer. The Discover card requires that you make at least two purchases or cash advances each billing cycle. But there's no requirement for how big these new purchases must be. So if you keep them small, it can be close to an interest-free loan. "Obviously, the hurdle is very low," says Doug Prey, a Discover marketing official. "You could fill up your gas tank or get a prescription at a local drug store."

The banks are mailing the 0 percent percent offers and other low lifetime guarantees to customers who have both large balances and good credit ratings. The banks say customers may request these cards, but they won't get one unless they meet the bank's criteria.

Most cards will allow you to transfer balances up to your spending limit, which can be as high as $50,000 for affluent customers with good credit ratings.

Most credit cards offering "rates for life" let you transfer balances from other cards only for a limited time after you open an account. The Chase card, for example, gives you nine months from opening the account to transfer balances, but Discover gives you only four months.

Some of the new deals offer better initial rates for new purchases. For example, an American Express Blue Card offered in April gave a 7.99 percent balance transfer rate for life and a 0 percent rate on purchases. But, after six months the rate on purchases jumps to 14.24 percent.

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