Financing My Eyes – Seeing Clearly After a 0% Interest Promotion

Last December, I gave myself a gift that I’ve been wanting for a while.  I finally pulled the trigger on correcting my vision with Lasik surgery.  Before surgery, I was practically blind without my glasses or contacts.  I’m telling you, Lasik surgery was life-changing for me!

After I decided I was finally ready to get the surgery, the process happened really fast.  Within one week of choosing a doctor, I had a consult. The same day I was approved for surgery and as luck had it, there was a cancellation.  I could get surgery the very next day instead of sitting on their waiting list for a few months.

The day before the surgery, the office manager asked me which method of payment I’d like to use to pay for my Lasik.

“Will you be paying y Cash, Cashier’s Check, Credit Card? Or would you like to apply for our 0% Financing and no payments for 24 months?”

I didn’t feel like messing with the logistics of withdrawing a couple thousand in cash out of my ATM. So, I narrowed my choices down to using a credit card or their 0% financing offer.

0% Financing and no payments for 24 months?  Hello, Rich Dad, Poor Dad, I thought, this was a 2 in 1 benefit for me.  First, take out one small loan and get the benefit of paying off a loan (looks good on my credit). Second, free up all that cash flow for two years that I would have otherwise had to pay off right away to avoid interest on my existing credit card. I was approved for the exact amount that my surgery cost. Perfect.

I Can See Clearly Now

Even though I had up to two years to pay off my surgery at 0% interest, I decided that I’d pay a little bit each month instead, that way I wouldn’t be stuck with a huge payment on month 24.  I’m so smart, right? Fast forward a few months and I’m checking my Credit Karma (have you checked yours yet?) and I can’t believe what my newly perfect eyes were seeing.  That “loan” I had applied for wasn’t actually an installment loan (like a student loan or a mortgage) like I assumed.  I had unknowingly applied for a credit card.  Whoops.

So no big deal, right?  I had still had 24 months to pay off the cost of my surgery with 0% interest and no monthly payments for two years.  Even though I’m not being charged interest because I’m still within my 24 month payback period, when I check my credit report, this was the non-monetary damage I saw.

Credit Utilization

Since the amount of credit I was offered and the cost of my surgery were the same, it was KILLING my credit utilization score which accounts for 30% of your credit score.  Ideally, FICO likes when you keep your credit utilization under 10% for all of your credit cards.  After only two months of paying, my card was at 89% utilization!

Age of Credit

My brand new credit card was just a baby compared to some of my older accounts I’ve had for 10 or 15 years.  This new card was bringing down the average age of my credit accounts, 15% of my FICO score.

New Credit

Aside from impacting my credit score by wrecking my utilization rate and skewing the average age of my credit, applying for this card, also added another “hard inquiry” to my credit report.  New credit or the number of hard inquiries on your report, make up 10% of your credit score.

Hindsight is 20/20

In my personal example, opening this credit card by accident only hurt my credit score, it didn’t cost me anything dollar-wise.  However, there are a few more things to think about that could cost you some serious money pains if you find yourself in a similar situation.

Sneaky Terms & Conditions

Read the fine print.  Interest on your promotional offer is actually accruing the entire time you have your account.  Depending on the terms of the offer, if you miss a minimum payment or fail to pay off the amount by the time the promotion expires, you’re on the hook for the all the interest from Day One of opening your credit card.

On some offers, the final payment due date and the billing cycle don’t sync up, so watch out if you plan to use the entire promotional period to pay back your debt.  With 0% financing, creditors are hoping that it’s going to take longer than the promotional period for you to pay off your debt.  In addition, they are also betting on you to continue to use the credit they have given you, along with the interest rate, after you have paid for your initial purchase.

UNPLANNED Life Events

In a situation where it’s iffy if you can actually afford what you’re financing at 0% interest, you shouldn’t be doing it.  Sure, it’s easy to think about paying off a large purchase if you get one or two years to budget the expense but what happens when that promotional period is up and you didn’t stick to your budget, lost your job, or have other big life event or emergency eat up your savings?  You’re SOL and stuck packing back your initial purchase plus some majorly crazy high-interest fees, possibly even late fees too.

PLANNED Life Events

Is a major purchase like a new home or car in your near future?  If so, you don’t want to risk getting saddled with a higher interest rate and higher monthly payment because you damaged your credit score with a 0$ financing offer.  It will be cheaper to forgo the 0% promotion and make your purchase in cash.  Preserve your credit score for future major purchases.

What Did I Learn?

Always, always, always, read the fine print.  I had heard of 0% interest loans on vehicles and I assumed this offer was the same type of loan. If you are reading the fine print and you don’t understand it, find someone who can explain it to you, before you sign-up.  Although my credit score initially dipped about 15 points because of this card, I’ve made some intentional choices to get my score back to where I want it to be.  I’m also going to take my own advice. I’m going to pay off this card before the promotion is up, and close this sucker out.