How do 0% APR credit cards work?

Curtis Arnold
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Curtis Arnold
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How do 0% APR credit cards work

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Credit cards offering introductory 0% APR (annual percentage rate) have become a staple of the credit card industry. I have been a big fan of these offers over the years and have taken advantage of several introductory offers and saved thousands of dollars in interest.

While 0% offers are certainly popular among consumers and can be a very effective way to pay down debt, these offers can also do more harm than good if they aren’t utilized in a savvy manner. It is my hope that this primer on 0% APR cards will empower you to use these offers to your financial advantage.

What does intro 0% APR mean?

If a card offers intro 0% APR it simply means that it offers an introductory period where no interest is charged on new purchases made with the card. These offers clearly state how long the introductory period is for. Any purchases made outside the introductory period, or any balances remaining once the introductory period expires, will be charged regular APR.

There are also intro 0% APR balance transfer offers which allow people to transfer balances from one card (usually one with a higher APR) to a new card featuring a 0% intro APR period. These offers give cardholders a set period of time to pay their balances off interest-free. Again, once the introductory period expires, any remaining balances will be charged regular APR, so with these offers it’s important to pay things off within the interest-free window to maximize savings.

According to Dr. Mary Ann Campbell, CFP and founder of MoneyMagic.com, 0% APR simply means that you have a period of months in which you aren’t charged interest on your card purchases and/or balance transfers. While these are not bait-and-switch offers, the 0% rates are temporary and typically last anywhere from 12 to 21 months.

Following the introductory period, Campbell notes that the rate will jump to the normal ongoing APR, which “can be quite high”- average APR rates are currently above 20%.

While 0% transfer offers can save you a lot by not charging you interest, particularly if you transfer an existing balance from a high-rate card, these offers are not typically fee-free. Campbell explains that an initial one-time fee of 3-5% (fees can vary) is usually charged on balances transferred. The good news is that if you take advantage of a 0% purchase APR, there are no fees.

BONUS TIP!

Finding 0% APR offers that apply to both transfers and purchases is the best way to maximize potential interest savings. To find these offers, be sure to look for any marketing language that states the 0% APR is good for both transfers and purchases. Also, be sure to verify the length of the 0% offer – the 0% purchase rate length may be different from the length of the transfer rate.

When will you get charged interest?

A common question I’ve heard over the years is when exactly do interest charges start once the introductory period ends? The short answer is as soon as the intro period expires. In other words, you don’t get to enjoy a grace period of up to 25 days like you do when you make a new card purchase.

According to Beverly Harzog, credit expert and podcast host of “Your Personal Economy,” you’ll be charged interest at the go-to rate (the ongoing normal purchase APR) when your introductory period ends. So, if you have a 21-month 0% APR, you can pay down the balance for 21 months without paying interest. If you have a remaining balance at the 21-month mark, you immediately begin paying compound interest on it.

Campbell encourages cardholders to refer to their cardholder agreement on the front end when they are considering a transfer offer. She advises that you “take the time to read the small print in the cardholder agreement to understand the terms and particularly the repercussions if the 0% card is not paid off before those enticing rates expire.”

She adds that “0% APR expiration dates come more quickly than many people anticipate. It can be a real ‘got-cha!’ for people who have a lot of high-interest debt and are unrealistic about the amount of time they’ll be able to whittle it down using a 0% APR transfer offer.”

Finally, there is one caveat to be aware of with any balance transfer card you choose. You should never use a balance transfer card for new purchases unless the 0% rate also applies to new purchases. This is because purchases will accrue interest at the normal purchase APR. Moreover, making new purchases can cause your debt on the new card to increase and/or slow down your debt repayment plan.

BONUS TIP!

You typically must have good credit score to qualify for most 0% APR offers. If your score isn’t in the 700+ range, you may want to focus on increasing your score before applying since getting declined for a new card can temporarily lower your score.

Who are 0% intro APR credit card offers good for?

While 0% APR offers have mass appeal, they aren’t for everybody. According to Harzog and Campbell, you are a good candidate if you meet the following criteria:

  • Zero percent purchase offers are great if you plan on making a large purchase (such as a new appliance) but don’t have the funds to pay for it right away.
  • If you have a realistic plan to pay the purchase or transfer off in full before the introductory period expires, you could be a good candidate for these cards. In this case, the card can be used as a short-term interest-free loan.
  • If you follow a budget and closely track your spending so you don’t overspend, you might consider these offers.

Other considerations involve income and spending. If you take a side hustle, receive a raise, or slow your spending, you’re a better candidate than a consumer who has experienced an income loss and/or whose spending has increased. This is common sense to a degree, but the point here is that you must consider several factors to determine if a particular offer is best for you. 

Final thoughts

Zero percent intro rate offers are certainly popular among consumers and have a lot of benefits. Herzog and Campbell sum things up best by noting that whether you’re getting out of debt or paying for a costly purchase, you can save a lot of money on interest or finance charges with these offers. Other potential side benefits include reducing your stress and improving your credit score.

However, as noted above, these offers are not a good fit for everyone and you definitely should do your homework before applying for such offers. The last thing you want to do is dig yourself into a deeper financial hole!

BONUS TIP!

You might be wondering what to do with your card once the intro rate ends. Harzog advises that you keep the card unless it becomes a temptation to overspend. Every card can help you build a good score if used responsibly. On the flip side, closing an account could harm your score as it could affect your credit utilization ratio. If the card doesn’t charge an annual fee and your balance is paid in full, there should be no harm in keeping the account open.

author
Curtis Arnold
CardRatings Founder

Curtis founded Cardratings.com in 1998 and, in so doing, helped pioneer the concept of rating credit cards. He has been a nationally recognized expert in consumer credit for well over 20 years. He is the author of “How You Can Profit from Credit Cards: Using...Read more

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