What is a teaser rate and why would a credit card companies use one?

Introduction

A teaser rate is a promotional interest rate offered by credit card companies to attract new customers. It is a temporary, lower interest rate that is usually applied to balance transfers or new purchases for a specific period of time. In this article, we will explore what a teaser rate is and why credit card companies use them.

What is a Teaser Rate?

A teaser rate, also known as an introductory rate or promotional rate, is a low interest rate offered by credit card companies for a limited time. It is designed to entice new customers to sign up for a credit card and encourage them to transfer balances from other cards or make new purchases.

Teaser rates are typically lower than the regular interest rates charged by credit card companies. They can be as low as 0% or have a significantly reduced interest rate compared to the ongoing rate. The duration of the teaser rate varies, but it is commonly offered for six months to a year.

Why Do Credit Card Companies Use Teaser Rates?

Credit card companies use teaser rates as a marketing strategy to attract new customers. Here are some reasons why they choose to offer these promotional rates:

1. Attract New Customers: Teaser rates serve as an incentive for individuals to apply for a credit card. The promise of a low or 0% interest rate for a certain period can be appealing, especially for those looking to transfer a balance from another card or make a large purchase.

2. Increase Balance Transfers: Credit card companies often offer teaser rates specifically for balance transfers. By enticing customers to transfer their balances from other cards, they can expand their customer base and potentially earn interest on the transferred balances once the promotional period ends.

3. Generate Revenue from Interest Charges: While teaser rates may seem like a loss for credit card companies, they can still benefit from interest charges. Once the promotional period ends, the regular interest rate kicks in, allowing the company to earn interest on any remaining balance.

4. Compete with Other Credit Card Companies: In a highly competitive credit card market, offering teaser rates is a way for companies to stand out and attract customers. By providing a more attractive promotional rate than their competitors, credit card companies can gain an edge in acquiring new customers.

5. Encourage Card Usage: Teaser rates can also encourage cardholders to use their credit cards more frequently. The lower interest rate during the promotional period may incentivize customers to make purchases they might have otherwise postponed, leading to increased transaction volume for the credit card company.

Conclusion

Teaser rates are temporary, low interest rates offered by credit card companies to attract new customers. These promotional rates serve as a marketing tool to entice individuals to apply for a credit card, transfer balances, and make purchases. While they may seem advantageous for consumers, it is important to carefully consider the terms and conditions associated with teaser rates before making any financial decisions.

References

– Investopedia: www.investopedia.com/terms/t/teaser-rate.asp
– The Balance: www.thebalance.com/what-is-a-teaser-rate-4585888
– NerdWallet: www.nerdwallet.com/article/credit-cards/teaser-rate