Zero Interest Credit – Is It Too Good To Be True?

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The old adage is that if it sounds too good to be true, it probably is. Browsing through your mail you’ve likely come across no interest credit solicitations from various institutions and wondered how they can do that. In the case of zero interest credit, the adage actually doesn’t apply.

To understand how they can do it, you must consider how banks operate. Modern banks operate through the use of short term financing and interbank loans, which are used for lending and, in turn, profit making. In other words if a bank isn’t lending money it isn’t making money. Since the great recession hit, interest rates have remained at historic lows and banks have been able to borrow at near zero percent from the Federal Reserve. Banks will then lend funds out through a variety of products with a variety of terms. Again, with rates at historic lows, banks are able offer better rates to their customers.

But still, borrowing at zero and lending at zero doesn’t make sense, right? If you think about other ways that banks make money, it makes complete sense. Consider what banks do with credit card receivables.

Since 1987 banks have pooled credit cards securities into an asset backed security, which is then sold to investors. With over $200 billion in securities issued, companies such as Citi fund upwards of 50% of their credit card loans through asset backed securities using credit card receivables as their asset. Much like their mortgage and auto loan backed securities brethren, they’re sold based upon the creditworthiness of the pool. The ratings range from AAA to D, with AAA being deemed the least risky.

In other words, business owners and other highly creditworthy borrowers are pooled together into AAA rated securities which offer the least risk to the investor and pay a lower rate of interest. Marginal borrowers, or those considered subprime, would be a higher risk and a lower rating, which requires a higher interest payment. The bank subsequently uses the investor’s capital to fund more credit card loans while the investor earns interest on their investment.

In recent years, banks have tried to make fees part of their “bread and butter.” Not only do they do this to pad profits, but also to make up the difference for lost interest. Want to transfer money from a higher rate card to an interest free card? There’s a balance transfer fee for that. Unlike revolving cards or credit lines with an interest rate, the balance transfer fees may be uncapped to make up for lost interest income. Moreover, some cards also have an annual fee, which is simply you paying for the privilege of having the card or line of credit. Annual fees are most common on rewards cards which, generally speaking, do not offer interest free terms.

Working with a company such as Credit Card Builders, which specializes in helping small business owners obtain no interest business credit, can help you sort through the morass of balance transfer fees and annual fees to ensure that your APR is as close to zero as possible.

Although the zero percent interest term may be capped, CCB Corporate Officer, Ari Page, mentioned in a recent radio talk show interview that “If you’re a professional and you know what you’re doing, that’s just not the case. Banks hope you’re not savvy enough to realize that if you know who to talk to and what to say, you can keep rolling over zero interest introductory offers for the foreseeable future” using what he calls “exit strategies.” According to Mr. Page, business owners are the “crème de la crème” in the banking community and can take advantage of special promotional codes and techniques that aren’t available to the regular borrower.

Finally, as a new customer, the bank can also start to broaden the relationship by introducing you to other services through affiliated marketing. As previously stated, small business owners are some of the most sought after clients in the banking community. They oftentimes have significant assets, are extremely creditworthy and are diligent in repaying their debts. If the bank can create a package of services for you, it’s a goldmine for them; whether it be investing, merchant solutions or even liability insurance. This package provides them with the ability to profit in their other business units through simply lending to creditworthy business owners at rates near what they’re borrowing at themselves.

See, it’s not too good to be true; it’s a savvy business move. Banks need to lend money to make money, and you need to borrow money to make money. The banks simply engineer the deal hoping that you’re not savvy enough to realize that they’ll allow you to borrow for next to nothing, while they sow the seeds for their long term benefit. 

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