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When is zero-percent-interest financing a lot more expensive than free?

When it taints your credit score.

And, be advised, it can do that.

When I'm talking about zero-percent financing, I'm talking about the enticements you've seen aplenty lately: "Buy now and pay no interest for an entire year."

The trouble is that if you go for this little financial treat, you could pay dearly for it.

The loans charge you no interest if you pay them off completely before the due date. But even if you are perfect with your payments, these tantalizing little loans can backfire, playing nasty tricks with your credit score.

If you are planning to buy a house or car or refinance a mortgage in the near future, you will need the best credit score you can get. So, for smaller purchases you might want to just say "no" to the zero-percent deals.

One of the little secrets about credit scoring is that bad things can happen to good people when they make seemingly solid financial decisions.

For example, buying a few thousand dollars' worth of items and paying no interest while your money sits in the bank earning interest can be a savvy move if you are meticulous about payments. If you aren't diligent, the zero-percent interest can be withdrawn and 21 percent or higher can be imposed on the loan. So taking a zero-percent loan and missing the last payment wouldn't be savvy at all.

But if you know the rules and play by the rules of paying on time, you might think you are pretty clever to use a loan for free. Too bad the credit scoring bureaus don't look at you that way. Given their formula for credit scoring, they are likely to regard you as a loser.

It's because the zero-percent financing often comes from finance companies, not the retailers, said John Ulzheimer, who learned credit scoring from the inside at Equifax and Fair Isaac Corp. credit firms. He's the author of the book "You're Nothing But a Number."

You can get some information about what influences credit scores at MyFICO.com, but not all details are disclosed, which makes Ulzheimer's perspective valuable.

Credit score blemishes

Credit-scoring firms look at finance companies as lenders of last resort, where desperate people go when they can't receive cheaper financing elsewhere, he said. So by taking money from a finance company, your credit score receives a major blemish, perhaps shedding 40 points.

Does that matter?

Probably not if your credit score is in the high 700s or 800s. Generally, people can receive the best terms on car or home loans if their FICO credit score is above 720. But knocking 40 points off a lower credit score could disqualify you from an attractive interest rate

It gets even worse.

If that 12-month zero-percent loan comes to you in the form of a credit line, or a revolving loan, you might have committed another inadvertent, but nasty, mistake. Credit scores are lowered when you have borrowed a large percentage of your maximum amount. So if, for example, you have a $10,000 line of credit and you use $6,000 of it, it looks like you are using a lot of available credit, and you look like a higher risk. The amount of total credit used is called credit utilization.

Ulzheimer said you should try to carry a balance that is no higher than 10 percent of the limit you are allowed.

That applies in two ways: 10 percent of each credit limit, or, for example, the limit on a single credit card or credit line from a finance company. In addition, you want to keep the total of all your balances on revolving credit, or personal credit lines and credit cards, to 10 percent of the total.

Source : http://www.newsday.com/