There's no free money

Dear Dr. Don,
Should I borrow money that I do not badly need at zero percent interest for the first year?. -- Ken Credit

Dear Ken,
It depends. What are you going to do with the money? If you invest it in a one-year CD, then you've earned an arbitrage (riskless) profit on the loan and you're ahead money. Required monthly payments on the loan, however, could limit options when it comes to investing the money.

More often these loans are balance-transfer offers or cash advances from credit card companies at zero percent through a 12-month teaser period. Using zero-percent money to finance credit card balances with higher rates seems like a no-brainer with a balance transfer, but it's not as straightforward as it looks.

Make sure you fully understand the terms of the loan agreement. If a credit card company is offering you the loan, does it require that you make purchases on the card through the year? How are payments allocated between purchases and the initial loan amount? What is the interest rate on new purchases?

Here are some other key questions to ask as you comb through the offer:

• How long does the introductory rate last?
• What is the card's annual percentage rate after a teaser rate expires?
• Does the teaser rate apply to transferred balances, new purchases or both?
• Does the card charge a balance-transfer fee?
• What about late fees and over-the-limit fees?

Remember that getting an offer in the mail for zero percent doesn't mean that you'll qualify for the offer. Cash-advance fees and transfer-balance fees may apply even though there's no interest expense. Be careful to make timely payments on all your debts because late and missed payments on any debt could trigger the end of the zero-percent teaser rate.

It's not free money; it's the use of some money for free. You still have to pay it all back, just not with interest. You should know yourself well enough to predict whether you'll be responsible with the loan proceeds and use it to your financial benefit or whether you'll just use the money as an excuse to spend more. If you're not sure of your financial discipline, then let this offer pass you by. You'll save money in the long run.