Is Zero Percent Financing a Free Lunch?

They're not zero-calorie drinks, they're minus-calorie drinks. Because your body has to warm the liquid up to body temperature, you actually burn calories with every swig. So, zero calorie soft drinks are actually a better deal than advertised.

Zero percent financing, on the other hand, may not be. Many such deals are simply a bait-and-switch ruse. Even when they're legit, they can wreak havoc with your credit.

Bait and Switch Come-On

Car dealers, and more recently furniture, appliance, and home electronic outlets, have been using zero percent financing as a come-on. With the economy in the toilet and consumer optimism down the drain, merchants are trying anything to entice consumers back into their stores. At face value, the offer to let you borrow their money "at no cost" looks like a heck of a deal. Often, it isn't.

Before you take the bait, read the fine print. You'll probably discover you don't qualify unless you have a credit score of 760 or above, can afford to pay for the product in relatively short order, are willing to purchase what's in stock, or are willing to buy at sticker price. Then there's another problem.

There's No Free Lunch

Retailers aren't stupid. They don't make zero percent loans unless there's something in it for them. So, they raise the price of the product, or they hit you with ridiculous penalty fees and outrageous interest rates if you're a few days late on a payment. Watch out, those interest rate hikes are sometimes retroactive to day one — even if you miss the 35th monthly payment in a three-year contract.

(Speaking of free lunches, did you know the new consumer credit card laws specifically bar credit card companies offering pizza and other come-ons from operating within 1,000 feet of a college campus?)

Watch Your Back

Even if you're one of the lucky people who qualify for the zero percent deal and you manage to buy the product at a reasonable, uninflated price, watch your back.

30 percent of your credit score is based on credit utilization. When you buy something on credit — whether it's at zero percent, six percent, or 16 percent — it increases your credit utilization. According to John Ulzheimer, a nationally recognized credit expert, people with scores above 760 have an average credit card utilization of just 7 percent.

Also, 15 percent of your credit score is based on your credit history. Each time you open a new account, you lower the average age of your credit and potentially lower your credit score.

Another issue to consider before you sign on the dotted line of that credit application is that credit inquiries can hurt your score, particularly if multiple creditors check you out over a short period. Those new inquiries stay on your report for two years, potentially warning other creditors that you're desperate for credit.

Look Ahead

The nation's astronomical debt will surely lead to higher interest rates in the future. Today's rates are unlikely to go down much further (there's nowhere to go), so buying on credit right now — if you really need what you're buying and not dazzled by the bait — isn't a bad idea. Just be sure you do the math before you jump on that "great deal." Even at zero percent interest, a $30,000 three-year car loan will suck $833 a month from your cash flow. You can go broke saving money.

Should you just pay cash and forget about credit scores and interest rates? In a word, no. If you can afford the payments, especially when rates are low, use your credit — your cash is always good.

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