Low Introductory Rate Credit Cards & a honeymoon for your credit balance

Honeymoon periods on credit cards are just like the honeymoon of a marriage: they start off well enough but the real work begins afterwards.

If you are thinking of utilising a honeymoon period, you should read this article and make sure you know what you‘re getting - not all that glitters is gold.

What is a honeymoon period?

A credit card honeymoon period gives you a reduced rate of interest for the select “honeymoon” or introductory period. During this defined period, annual and regular account keeping fees may also be suspended.

How does a low introductory rate help?

If you have a large credit card debt, a honeymoon period can ease the burden and help you pay it off during the honeymoon period. The best way to use a credit card is to pay it off in full each month so that you avoid interest charges. If you’re in a position where you’re unable to do this, a honeymoon period might help you get back on track.

Case Study: Jack’s Honeymoon

Jack has a credit card debt of $3000 with an interest rate of 10% per annum. What would happen if he transferred his debt to a credit card with a honeymoon period of 6 months at 0%. (For the sake of this simplified example we’ll just calculate the interest on the balance at the beginning of the period - not compounded -and suppose he doesn’t make any additional purchases or repayments.)
The Honeymoon period

 

Current Card

Honeymoon Card

Credit card balance

$3000

$3000

Interest Rate

10%

0%

Annual Fee

$50

$0

Period

6 months

6 months

Interest Accrued

$150

$0

Total owing

$3200

$3000

So, by transferring to the honeymoon card Jack could save $200 over the 6 months. Sounds like a good idea. But remember, if the honeymoon card’s standard rate, after the 6 month introductory period is more than 10% then he could eat up this $200 saving fairly quickly if he still hasn’t paid off his $3000 balance.
Let’s suppose the honeymoon card reverts to an 18% interest rate after the first 6 months and Jack still hasn’t managed to pay off any of the $3000 debt. What would happen over the next year?
The following 12 months

 

Current Card

Honeymoon Card

Credit card balance

$3200

$3000

Interest Rate

10%

18%

Annual Fee

$50

$50

Period

12 months

12 months

Interest Accrued

$320

$540

Total owing (this 12 months)

$3370

$3590

Total owing (for full 18 months)

$3570

$3590

So, at the end of the following 12 months the honeymoon card has actually cost $20 more overall.

Is a honeymoon the answer to my dreams?

Honeymoon period credit cards are very appealing but remember that, like any honeymoon, read the fine print. Here are some questions you should ask before entering into any agreement:

  • What is the interest rate after the honeymoon period ends? In Jack’s case, he would have been better off sticking to his lower rate card if he wasn’t able to pay off his balance in the honeymoon period;
  • What does the reduced rate apply to? Some providers only apply the reduced rate to the balance you are transferring over. For every cent you spend over the original balance amount, a higher interest rate may apply;
  • Are there penalties for late payment? If you are late in paying a repayment amount, even by a day, some providers will revert your account to their standard interest rate and will disallow you from reverting back once you’ve paid.

In essence, before you decide to take advantage of a honeymoon period, make sure you know and understand the fine print. Get a friend or colleague to read it. Whatever you do, don’t sign anything until you know what it is you’re signing.

Where can I get a honeymoon period credit card?

Most of the major banks and credit unions will offer some form of introductory period credit cards. However, a growing number of banks – such as the Bank Of Queensland - are now ‘boycotting’ the idea of honeymoon periods and, instead, are focusing on offering lower interest rates all year round. When shopping around, check out these offers since, long term, they may yield greater savings.

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