discover no interest checks
Question: hello, we’re thinking of taking out a small home equity loan to finance some landscape work for our house this year. however, i just received a few checks from discover that claims to offer free interest til apr 05. they would continue the free interest offer after apr 05 so long as you charge at least $50/mo on the credit card. there is a 3% (up to max $50) up front charge but that seems nominal if you plan to borrow several thousand. anyone using this offer or had any thoughts on the matter?
Answer: The main catch here is that payments are applied to the balances at the lowest interest rate first. Thus an increasingly larger percentage of the remaining balance will be at your standard interest rate every month.
Assuming you don’t use the card at all except for your required $50/mo, and assuming a standard interest rate of 16% (just a guess) by this time next year you’ll have a $500 balance at the regular rate and will have paid $37 in interest. By 1/2007 that will be a $1100 balance and $169 in total interest; by 1/2009 $2300 and $721 total interest.
The more you borrow, and the quicker you pay it off the better the deal. You’d have to run the numbers based on your specific plans to see whether it really makes sense. Note that the home equity loan’s interest will probably be tax-deductible so its true cost is probably ~80-90% of the actual dollar amount.
The deal quickly starts getting worse if you use the account for more than the required $50/mo. To get anything out of 0% offers you cannot use the account for *anything* else.
Another catch is that a single late payment, to Discover or anyone else on your credit report, may be enough to jack the 0% up to the standard rate, or even higher.
As such things go, this isn’t a very good offer. If your credit is good you should be able to get 12 months at 0% with no transaction fee on a separate account with no purchase requirements. Discover may be willing to sweeten their offer this much, but if not one of their competitors will.
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Filed under: Home Equity Loan
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