The Annual Percentage Rate (APR) is a measure of the actual cost of borrowing money through a credit card, loan, or other line of credit. For example, in the case of a mortgage or loan, the APR combines the interest rate of the loan with additional loan processing fees (such as the origination fee associated with a mortgage) to arrive at the complete and accurate cost of borrowing money.
If the money you borrow has a 0 percent APR, you won’t accrue interest on that money for a period of time.
A zero-interest credit card, or 0 percent introductory APR credit card, allows cardholders to make interest-free payments on purchases, balance transfers, or both for a set period of time. Credit card APR is commonly synonymous with credit card interest rate, since credit cards do not have loan processing fees. And because the APR is calculated based on the daily periodic interest rate and multiplied by 360 or 365, the credit card APR is a good indication of how much it will cost to borrow money over a one-year period.
But is a 0 percent APR credit card right for you? This guide will help you decide by breaking down how to make the most of a 0 percent APR period.
How does the 0% introductory APR work?
You’ve probably seen those enticing 0 percent introductory APR offers that credit card companies use to attract new cardholders, but what does a 0 percent APR offer actually mean?
In most cases, 0 percent APR is a special promotional interest rate. The benefit of a credit card that offers a 0 percent introductory APR is that you can borrow money for a limited period of time (usually 12 to 21 months) without any interest accruing on your eligible credit card balance.
During this period, you’ll be required to make the minimum payment each billing cycle, but you won’t be charged interest on any eligible balances you carry until the introductory period ends. If you pay off your balance before the introductory APR ends, you’ll avoid interest entirely, allowing you to pay off your debt faster or get your savings back.
Most cards have a grace period during which you don’t pay interest on purchases as long as you pay your credit card statement balance in full each billing cycle. In this case, the APR doesn’t matter as much. However, if you don’t make the minimum payment or pay your statement balance in full, you’ll still be charged interest on any balance carried over to the next billing cycle, unless you’re in a 0 percent APR period.
The two most common 0 percent APR offers are for new purchases and balance transfers, and credit cards often offer both to new cardholders.
0% introductory APR on balance transfers
You can use a balance transfer card to pay off another debt balance (such as a car loan or personal loan), but not all issuers allow this. If the interest rate on your loan is lower than your credit card interest rate and you might not be able to pay it off in full in time, there’s little point in using a balance transfer card.
The best balance transfer credit cards are generally for people with good to excellent credit. These cards have a 0 percent introductory APR offer that can help you save on interest, and they often give you a year (or more) to pay off your debt. Once the 0 percent APR period ends, interest will start accruing on the card’s balance.
By transferring your balance from a high-interest credit card to a card with a 0 percent introductory APR, you can ensure that your entire monthly payment goes toward your original balance and you don’t incur any additional interest, at least for the duration of the introductory APR. In most cases, you’ll have to pay a balance transfer fee, which typically ranges from 3 percent to 5 percent of the balance transfer amount.
0% Introductory APR on New Purchases
Some issuers offer 0 percent APR on new purchases for a limited time to encourage you to apply for their credit card. For example, some of the best no-interest APR cards offer 0 percent APR on new purchases for the first 15 months. During that time, you only have to pay the principal balance on the card (the amount you’ve actually charged) and you don’t have to pay any additional interest.
This can be a great way to finance a big purchase or pay for an unexpected medical expense, as long as you plan to pay off the debt before the 0 percent APR offer expires.
0% introductory APR and late payment interest
That said, there are important differences between 0 percent introductory APR and late payment interest offers that you should know about: With a 0 percent introductory APR, you don’t pay any interest during the introductory period. Your regular interest rate only applies to any outstanding balance remaining at the end of the introductory APR period. There’s no secret clock running in the background that adds up fees.
Late interest, on the other hand, postpones interest payments until the end of the term. If you pay off the entire balance by the end of the term, you won’t accrue any interest. However, if you owe even a penny on your balance after the end of the term, you could be liable for up to 100 percent of the interest costs accrued during the late interest period. Plus, interest continues to accrue while you’re paying off the outstanding balance.
So unless you’re absolutely sure you’ll be able to pay off your entire balance before the late interest period ends (and you’ve double-checked that you don’t accidentally owe any money), offering late interest is almost never a good idea.
0% APR mistakes to avoid
When taking advantage of a 0 percent APR offer, certain mistakes can jeopardize your good deal and send you back down to paying regular interest rates before the promotional period ends. Avoid these mistakes with 0 percent APR credit cards:
- Late payments
- Late payments
- Balance transfer takes too long
- Overspending and not meeting minimum payments
If you miss or make a late payment on a 0 percent APR credit card, the terms of the offer may state that the issuer may void the promotional offer. This can also happen if you don’t make at least the minimum payment each billing cycle. If you transfer a balance using a 0 percent APR card, you must transfer the balance by the due date (usually 30-120 days after the card is issued) to take advantage of the offer. If you transfer the balance after that point, you’ll pay the regular interest rate.
What happens when the 0% introductory APR ends?
When the 0 percent APR offer ends, your account will change to the terms set forth in your card agreement, and you will not accrue interest on any outstanding balances unless a late payment interest charge is associated with the card offer, but interest will begin to accrue on any outstanding balances after that date.
Before you choose a 0 percent APR credit card or finance a purchase, it’s important to understand the interest rate and fees that will apply after the introductory period ends. This is especially important if you don’t expect to be able to pay back the money you borrow before the promotional period ends.
That said, there are very few drawbacks to no-interest credit cards if used responsibly, and understanding the pros and cons of a 0 percent APR credit card can help you decide if it’s a good choice for you.
Tips for getting the most out of your no-interest credit cards
An interest-free credit card can be a great addition to your financial toolkit. But understanding what a 0 percent APR card is and knowing how to get the most out of it are two different challenges. Here are some tips to help you get the most out of a no-interest credit card.
- Please pay the remaining balance before the promotional period ends. The best way to get the most out of a 0 percent APR card is to pay off your balance before the introductory period ends, so you can get the credit you need without paying a single penny in interest. It’s a win-win.
- Don’t add new debt to a balance transfer. You might be tempted to add new debt to your card on top of the balance transfer amount and carry a balance, but this could prolong your debt. Plus, if you don’t pay off the balance before the introductory period ends, you’ll pay interest on the balance, defeating the purpose of the whole thing.
- Take advantage of 0 percent APR periods wisely. Plan to make the most of your interest-free periods. Use them to make payments early and maximize your savings. Otherwise, you’re just putting off your debt and not saving much.
- Avoid the temptation to overspend. Don’t use the interest-free period as an excuse to buy more or spend money you can’t repay. Just because your credit card payment is lower now doesn’t mean it will stay lower forever. Remember, once the introductory period ends, interest will start accruing on your balance at the regular APR.
Conclusion
Take advantage of 0 percent APR offers to help you finance a big purchase, pay off old debts, or borrow money without paying interest. Used properly, 0 percent APR offers provide convenience, peace of mind, and a way to get ahead financially.
Of course, this offer isn’t a license to overspend or buy things you can’t afford. If you don’t pay off your purchases or transfer balances before the 0 percent APR offer ends, you could find yourself back where you started.
