Credit Card 'Teaser' Rates: Zero APRs Are Back

Sept. 5, 2012 -- A credit card with a zero APR? Issuers are again offering an incentive that had all but disappeared during the recession: Introductory interest rates as low as zero for new customers, with grace periods that run from 6 months to 18. And the incentives don't stop there.

Other sweeteners have recently included Titleist golf balls and discounted tickets to NFL games, according to recent surveys of the industry.

When market research company Ipsos examined lenders' direct-mail credit card solicitations, it found that while in 2009 only 40 percent teased customers with a reduced introductory rate, that figure had risen to 80 percent by the first quarter of 2012.

Zero-rates aren't being offered just to people blessed with perfect credit, says Ben Woolsey, director of marketing and consumer research for CreditCards.com, a site that helps consumers comparison-shop card rates, grace periods and incentives. "The card industry has loosened their criteria," he says. "They were very conservative there for a while. Now they're starting to explore people with less than perfect credit."

Is it a buyers' market now for credit cards? Woolsey says yes. "Consumers are more in the driver's seat now than at any time in several years."

The reasons, he and other experts say, are various. They include issuers' improving financial health. Though loss rates on cards spiked during the recession, they now have declined to "historic lows." Thanks to the Fed's keeping interest rates near zero, issuers' borrowing costs, too, are at historic lows. Issuers, says Woolsey, feel confident about the near-term future. "That's why you see these pretty aggressive campaigns."

An August survey by CreditCards.com of 102 of the most widely held cards found 53 had a teaser rate of some sort. Of those, 49 had a rate of zero, says Woolsey. Some cards apply the introductory rate only to balances transferred from other cards; others apply it only to new purchases. But a lot of cards, says Woolsey, apply the rate to both.

During the recession, zero-rate promotions dried up. Card companies, says Woolsey, suffered steep losses and had to pull back on marketing. But since late 2010,"They have come roaring back. Now they're at the same levels as prior to the recession."

The same holds true for the length of no-interest periods: Before the recession, Woolsey says, they were generous, he says—some up to 24 months. After the housing bubble burst, the period dropped to 6 months or disappeared altogether. Now a full year is common, "and we're starting to see longer ones." The lengthening periods, he says, "are a sign that issuers are feeling more confident about the future and about the credit risk of new account members."

The Citi Simplicity Card, for example, which CreditCards.com rates its' top pick in the zero percent APR category, offers a grace period of 18 months.

After a card's teaser rate expires, the new APR that kicks in (assuming a consumer hasn't paid off his or her balance) can range from 9.99 percent to 25.99 percent, according to CreditCards.com's survey, depending on the consumer's credit score.

Is it possible to know, in advance, which rate will apply to you? To some extent yes, says Woolsey.

Your typical customer service rep, he says, either won't know or "won't go out on a limb and tell you." But even without knowing your credit score, you can get an accurate idea by determining which general category of risk you fall into—excellent, good, fair or bad. You can do that by using calculator tools widely available on credit websites, including CreditCards.com's.

The tools put you in one of the four categories by asking you multiple-choice questions about yourself and your finances. People rated excellent risks, naturally, get the lowest rate in the range--or one near the bottom; those rated poor risks pay the highest rate or one near the top. If you're fair or good, you're in between.

How many card holders fail to pay off their balance before their teaser rate expires? "A significant percentage," says Woolsey—more than half.

Before the recession, he says, credit card customers could "kick the can down the road" almost indefinitely, transferring their balances from one card's introductory zero-offer to the next. Today, that's not so easy. Yes, credit standards are relaxing. Yes, grace periods are lengthening. But we're still not back to the comparatively lax standards 2007.

If you take a zero rate, advises Woolsey, "You should make hay while the sun shines." Meaning? Pay off your balance before you get dinged with the higher rate.