How bad is 0 interest debt?

[norabird]

Spending more than one has is bad, and continuing old, debt-friendly habits is also bad. But how objectively bad is it to have credit card debts on cards at 0%, which can reasonably be paid off before there will be any interest?

I've managed to cut down most of my debt after getting serious about it, but without having yet killed it*, I don't have a cash buffer to handle new non-normal expenses. Right now these are mostly travel related for weddings: $730 in air travel for my favorite cousin's wedding, and $379 to book an airbnb for a friend's wedding next weekend in a ME resort town over the 4th of July. Because I need to attend the family wedding and want to be able to have a not insanely expensive place to stay for next year's wedding, I put both of these expenses onto my 0% credit cards. Now I feel bad because my credit card balances are over $1000 again (actually much more, but over half are other work travel expenses that will be reimbursed, unlike the personal travel).

So my question is: how bad is this really? I am not paying a financial penalty due to not having interest, so am I basically just using the credit cards in lieu of savings, which is possibly not so anti-MMM. But I am spending money I don't have, which is worrisome. But I'm spending that money in line with my values.

Basically I'm just curious how others would see this. I am sure some people find it appalling, but when I really think about it, I'm not sure it's actually hurting me.

*Likely because I took a vacation in turkey this summer...

[tvan]

It could impact your credit score (utilization), but that may not matter unless you need a good credit score for something (buying a house).

If you have a plan to pay it down I don't see an issue with it.  Just understand you are delaying FIRE.

[Retire-Canada]

So my question is: how bad is this really? I am not paying a financial penalty due to not having interest, so am I basically just using the credit cards in lieu of savings, which is possibly not so anti-MMM. But I am spending money I don't have, which is worrisome. But I'm spending that money in line with my values.

If it enables spending you shouldn't be doing it's bad.  If you are not saving enough each month that you can divert it and pay these expenses you aren't saving much which is bad. Then you are spending money you don't have which is worse. If you pay it off at a later date before you pay interest that's better than if you didn't, but that sounds like you are running a deficit budget for months at a time which means you can't be saving much.

Out of your gross take home pay what % gets saved and invested each month?

[nanu]

As mentioned, it will somewhat hurt your credit score, which may or may not matter to you.


However, remember that the 0% debt is still a debt - it will need to be paid back and the 0% isn't forever.
And using money you don't have is dangerous - you're taking a (0%) loan from future self, but future self might lose his job or have a medical emergency or something, and then that debt becomes a much bigger deal suddenly.
Personally, I sometimes use a card that has 0% APR (for the next 12 months or so) and not pay it in full, HOWEVER, I do have the money to cover it completely in my savings account whenever I'd like, and I just choose to make a little bit of extra interest on the bank's expense.

[norabird]

I should have mentioned I don't really have a FIRE goal. Work in a relatively low income field and am too lazy for side hustles. I want to be debt free (eventually?!), have some cash savings, save 25% in my 401k, not spend money on eating out/shopping. Credit utiliization is still quite low; I have probably $10,000 available to me on different cards, so I'm using around 20% right now. Most of the debt will be gone by december...I think the real challenge is not to just do this cycle forever, where in Christmas I am buying gifts (not many, and on a budget, but still) and traveling to see family and continue to put the extra spending on 0% cards. Then again, christmas does come with a bonus and often with gift money, so it could also be quite easy to make enough progress then that I move to building an EF.

It all comes back to whether I'm going to be on an endless merry-go-round of carrying a low-grade 0% balance and then the question of whether, given that it's 0%, it matters. But that feels like a potential slippery slope. Right now 20% goes into my 401k (including a 6% match). That's the sum total. I take home roughly $1650 each month: $600 to rent, $600 to debt service (again, no interest, but still), $50 to my cell phone, $30~ to charity, $333~ to food/alcohol of all types, around $33 to utilities.

[Telecaster]

Spending more than one has is bad, and continuing old, debt-friendly habits is also bad. But how objectively bad is it to have credit card debts on cards at 0%, which can reasonably be paid off before there will be any interest?

I think 0% debt is awesome.  There is a ticking time bomb when that rate expires, of course.  As long as you don't get blown up it is great.   

[nanu]

$600 out of $1600 every month is used to pay for your 0% debt? That seems like a giant risk to me! What will you do if you lose your job? Have a medical emergency? I think it's living way too close to a financial edge. And even if you can balance it just fine now, you never know when a random gust will blow you over the edge...

[norabird]

$600 is definitely a lot! But if I lost my job, I could pay the minimum and still have no interest for a year. I could also cancel the airbnb charge closer to the date if still unemployed, or find a different housing solution. I should have both the personal and work debt gone in two months with $600 each month and reimbursements. I hate having the debt now, and I want it gone ASAP, so I'd rather use everything extra for it.

I have however been unemployed before, which is why I would like to actually build an EF. I'm frustrated that I'm still having to put so much money onto the card instead of putting it into savings and charity (where I want to up my giving, a la The Life You Can Save). And I'm worried about my being stuck in debt payoff forever instead of actually putting it behind me.

Likely if I were in dire unemployed straits I could talk to my roommates about turning my bedroom into an occasional airbnb to earn some money. (It's also a place my parents bought).

I think it's mostly a mental thing, and a potential behavioral thing. My contributions to the 401k are slowly ticking away, albeit not at crazy rates. My debt isn't costing me anything except the possibility of a cash cushion and a slightly higher contribution rate. But it's nagging at me anyway.

[Endersmom]

How long is the 0% for? Instead of paying it off in 2 months would it be better to pay $300 a month and pay it off in 4 months. Putting the other $300 into savings starting an EF. This way you would be able to stop using revolving credit.

[MDM]

Spending more than one has is bad, and continuing old, debt-friendly habits is also bad. But how objectively bad is it to have credit card debts on cards at 0%, which can reasonably be paid off before there will be any interest?

No worse than paying for milk and bread with a CC and paying the balance due each month, thus never incurring a finance charge.  So assuming all your qualifiers apply (e.g., you actually avoid any finance charge, the purchases themselves were reasonable), I don't see a problem.

[slugline]

I think it's mostly a mental thing, and a potential behavioral thing. My contributions to the 401k are slowly ticking away, albeit not at crazy rates. My debt isn't costing me anything except the possibility of a cash cushion and a slightly higher contribution rate. But it's nagging at me anyway.

I'd say the above sums it up well. 0% debt is neutral, from a net-worth perspective. But from a behavioral perspective be aware that you can fool yourself into thinking you have more money than you really do. I have one of these open myself and find myself almost forgetting about it.

[Cassie]

I like the other posters idea about saving 300/month & paying CC the same amount since it is 0%. That should help you build an emergency fund so you can quit using your CC.

[tvan]

$600 out of $1600 every month is used to pay for your 0% debt? That seems like a giant risk to me! What will you do if you lose your job? Have a medical emergency? I think it's living way too close to a financial edge. And even if you can balance it just fine now, you never know when a random gust will blow you over the edge...

Umm he/she will just re-use the 0% card.  How is this not obvious?

[Jack]

0% interest debt isn't "debt," it's leverage!

(But it's really debt too.)

...

The key is to use it effectively and -- this is the important part -- not fuck up.

[Rosy]

^^^ I agree with Jack and the poster who mentioned pay $300 to the card and $300 to yourself so you have the beginnings of an emergency fund.

I'm in a slightly similar position, but opted to keep it paid off every month - because I don't want to rely on it and fall right back into a debt pattern.

However, if I had opened the zero percent card to pay for an event that I couldn't otherwise pay for and had no cash to fall back on - then I would figure out how many months I had left on zero, divide my balance by that many months, which would then become my monthly payment.
That should still leave a nice amount every month to start my new emergency fund with.
Never deviate from paying yourself first.

Like I said, I agree with Jack, I view zero percent interest as an opportunity - you get to eat your cake and ....

[TonyV.]

A bit off topic about the CC debt, but does no one else think 25% into a 401k is REALLY high? I'm assuming the company matches 3%? Why would you not put 3%-5% in the 401K and invest the other 20%-22% in something that will give a better ROI? I am a little new to all this, and i could be completely wrong. So please, call me an idiot if I am, that just stuck out to me.

[MDM]

Why would you not put 3%-5% in the 401K and invest the other 20%-22% in something that will give a better ROI?

What investments available only outside the 401k do you have in mind?

[The_path_less_taken]

0% interest debt isn't "debt," it's leverage!

(But it's really debt too.)

...

The key is to use it effectively and -- this is the important part -- not fuck up.

1+

And I consider it an awesome way to build  your credit: make regular monthly payments even if you don't have to. Even $20. Anything that shows a reliable, regular payment pattern.

Over the holiday weekend, new car ads and furniture places will bombard you with "0% interest: FREE MONEY!" ads.

They're only free if you can afford it, AND justify it in your overall budget/life plan.

[Another Reader]

In my opinion, your problem is overspending, not what type of debt zero percent cards represent.  In your shoes, I would decide I cannot afford the two wedding trips because I have to put them on a credit card.  If I could save the cash up to pay for the trips in addition to all my other savings goals, I would consider using the card as a tool once I had the money.  If I don't have the money to pay for the travel, I don't go.

Eventually these zero percent offers will go away and you will be left with the bill for your overspending, only at a much higher interest rate.  Add in a job loss or some type of emergency and you will be back on a very long road to being debt free.  Say no to spending now, and you can be in control of your money, not the other way around.

[Jack]

A bit off topic about the CC debt, but does no one else think 25% into a 401k is REALLY high? I'm assuming the company matches 3%? Why would you not put 3%-5% in the 401K and invest the other 20%-22% in something that will give a better ROI? I am a little new to all this, and i could be completely wrong. So please, call me an idiot if I am, that just stuck out to me.

First, around here, 25% is totally normal. It might even be a little low: contributing 25% but still maxing out the 401(K) requires annual income of at least $72000 (actually higher because I didn't account for tax and stuff). Mustachians with income closer to the median should be contributing more than 25%! (In other words, pretty much everybody should be trying to contribute the $18000 maximum regardless of percentage of income.)

Second, a 401(k) is just an account with certain tax advantages. Other than your employer limiting choices, there's no reason in principle why it couldn't hold any investment at all.

Third, other than entrepreneurship or super-risky speculative stuff, the stock funds available in a 401(K) are about the best ROI investment you can get (assuming reasonable expense ratios).

[worms]

... 0% debt is neutral, from a net-worth perspective.

What? I don't see the logic there.  Surely net worth is the total of all your assets less the total of all your liabilities? Even at 0%, the debt is still a future liability and MUST come off your net worth.  You may have an asset of equal value but I would think that in the vast majority of cases whatever has been purchased will have depreciated to some extent and/or not be easily realisable.

[shelivesthedream]

I agree with those who have said that this is a psychology problem, not a debt-type problem. I am EXTREMELY averse to debt, to the point that it would keep me up at night. I have a UK government income-contingent loan for ~£10,000 and enough money in investments to repay it instantly and I still kind of fret about it and wonder if I should just pay it off and forgo the money I'd earn on the investments.

On the other hand, some people can leverage themselves up to their eyeballs and walk around with a smile on their face because it's all part of their plan. And some people get into 0% interest debt and think it'll be fine and then lose track of things or spend a little more and then suddenly the interest-free period is over and they don't have the money and interest starts racking up.

My personal take on debt is: If all my creditors claimed in full on the same day, would I be OK? I don't own a house, and maybe I would feel differently about a mortgage, but I look at people who "own" their houses and think "You only own two rooms in that house - the bank owns the rest. Who knows, maybe I will be crazy enough to save up and pay cash. You'll have a different comfort level.