A 0% APR credit card is a credit card that offers an introductory 0% interest period for purchases, balance transfers, or both. Getting rid of finance charges can be a welcome change from the double-digit interest rates typically charged on credit cards. The less interest you pay, the more money you have available to pay off your debt.
Here’s what you need to know about 0% APR credit cards:
How does the 0% APR credit card offers work?
There are two types of 0% APR offers:
Purchases Use the card to make purchases and pay them off during the promotional period, interest-free.
Balance transfers Save on existing high-interest debt by transferring your balance to a 0% APR card.
Making purchases with the 0% APR card is easy. Just use your card as you normally would. Then, pay off the balance over time without incurring any finance charges over the life of the offer.
For example, make a $10,000 purchase on a card that offers an introductory offer of 0% APR for 12 months at the time of purchase, and you’ll have 12 months to pay it off without adding additional debt. However, at the end of the promotional period, the card’s standard variable APR kicks in. This means that if you still have a balance after 12 months, that balance will be subject to the card’s interest charges. Ideally, you will pay off the entire amount at the end of the card’s 0% offer.
There are additional steps required to make a balance transfer. Typically, when you sign up for a card with a balance transfer offer, you will be asked during the application process if you want to transfer the balance. Otherwise, you can contact your card issuer to initiate a balance transfer. If the card charges a balance transfer fee, this may affect the amount you are actually able to transfer.
For example, if you are given a $10,000 limit, but the card charges a 5% balance transfer fee, you will not be able to transfer the full amount. If you transfer $9,500, you’ll have to pay a $475 transfer fee, which puts you slightly below your total credit limit. It’s important to remember that, just like the 0% off purchase, any remaining balance on your card at the end of the promotional period will be charged at the standard APR.
Some cards offer 0% APR on purchases and balance transfers. Making purchases on the card is usually not a good idea if you are transferring debt that will take extra time to pay off. You should know that some cards offer 0% APR on purchases and balance transfers, and each card has a different promotional period. For example, a card can offer 0% APR on balance transfers for 18 months, but only for 6 months on purchases.
0% APR cards can help you pay off your debt faster.
Think of a 0% APR offer as an interest-free loan with a maturity date. When you use it the right way, it gives you extra time to pay off what you owe without having to pay more interest.
Here’s how the math works. If you want to buy $5,000 and your current card charges 18% interest, it will take 11 months to pay off your card if you pay $500 a month. In addition, you will pay an additional $458.11 in finance charges. If you make the same $5,000 purchase using a card with a 12-month 0% APR introductory offer and you pay $500 per month, it will only take ten months to pay off your balance without any additional finance charges.
If you want to pay off your debt with a balance transfer, keep in mind that many of the cards with the longest interest-free periods may also charge a balance transfer fee, usually 3% to 5% of the amount transferred. This fee may consume the actual amount you save from the transfer. For example, if you want to transfer $10,000 worth of debt to a card that pays a 5% balance transfer fee, it will cost you $500 to do so.
To make the best choice for your particular situation, calculate whether the cost of transferring the debt, including the balance transfer fee, is less than the interest you would pay on your existing card. A balance transfer may be a less expensive option if you need more than two or three months to pay off your debt.
Balance transfer fees are not charged by a few credit cards, including the American Express EveryDay® Credit Card*.As long as you can pay off your debt before the interest-free period ends, these cards may be a better choice. However, if you’re looking for the longest runway to settle your debt, it may be worth paying a transfer fee on a longer-term card with a 0% APR.
Balance transfer fees may apply, but they may be worth it.
If you’re considering a balance transfer card, be sure to consider any balance transfer fees when deciding if it’s right for your particular situation.
Here’s an example of how to figure out if a particular balance transfer offer is worth it for you: Let’s say you owe $10,000 on a card with a 20% APR. If you pay $1,000 per month on that balance, it will take a year to pay it off and you will pay an additional $1,030.45 in finance charges.
If you transfer the same $10,000 to a card that offers 0% APR for 12 months, the balance transfer fee is 3%. The balance transfer fee will add $300 to your debt. If you pay $1,000 per month, it will take 11 months to pay off the balance. Even after considering the balance transfer fee, if you leave it on the card at 20% APR, you will pay $730.45 less.
In contrast, if you transfer the same $10,000 balance to a card with a 0% APR for 21 months and a 5% balance transfer fee, you will pay a $500 balance transfer fee. Since you have 0% interest for 21 months, you pay only $500 per month and can still pay off the card before the no-interest period ends. Paying the same $500 on the card at 20% APR would take you 25 months to pay off your debt and you would incur $2,266.07 in interest charges. The 0% APR quote here will save you $1,766.07 after balance transfer fees are taken into account.
Zero doesn’t last forever.
When a credit card takes a tempting opportunity to reduce interest, it’s always for a limited time. Even the best 0% APR offers only extend for a specific period of time-usually from six months to nearly two years-before your card will revert to regular variable APR.
Make a plan to pay off as much as possible before the promotional period expires-ideally, the entire balance. Make a note of your offer’s end date so you won’t be surprised when your bill arrives after the happy interest-free time.
Don’t expect a 0% transfer offer bonus.
While some cards offer rewards and 0% APR, it’s unlikely you’ll find a card that lets you earn rewards by transferring your balance. Often, rewards are only earned on new purchases. The rare exception is the Priceline Visa Card, which offers up to 5,000 bonus points for balance transfers completed within the first 30 days of your card’s ownership.
If you have credit card debt, it’s not a good idea to focus on rewards anyway. According to the Federal Reserve, the average APR charged on interest-generating credit card accounts in the fourth quarter of 2019 was 16.88%. By comparison, credit card rewards typically offer 1% to 6% back on your purchases. The cost of interest charges will quickly exceed the value of the rewards earned.
Remember to consider the card’s ongoing attributes
When comparing different offers, disregard the promotional period of the card and consider whether you can use the card after you pay off the balance. features to consider.
Does the card have an annual fee? If so, is it worth keeping after paying off the debt?
What is the card’s ongoing variable interest rate? If you don’t think you’ll be able to pay off all or most of your balance and the card you’re interested in has an above-average interest rate, it may be better to use a low-interest card.
Will the card earn rewards? Once you’ve paid off your debt, will the card’s income structure match where you typically spend the most?
Taking advantage of the 0% offer may affect your credit.
With a few exceptions, when you apply for a new credit card, the issuer conducts what’s called a “hard inquiry” to get a copy of your credit report. New credit accounts for 10% of your FICO score, so you can expect your credit score to drop a few points when you apply for a new card. If you open many new accounts in a short period of time, this may signal to lenders that you may be too much of a risk to be approved for another line of credit.
A bigger consideration is how large purchases or large balance transfers affect your credit utilization. Credit utilization is 30% of your FICO score and is calculated by dividing your total debt (all credit card accounts) by your credit limit (all accounts). Typically, you want your overall credit utilization to be below 30%.
If you want to open your first credit card to take advantage of the 0% APR offer so you can make a $5,000 purchase, but you only extend your $5,000 credit limit, this will use 100% of your credit and will likely have a negative impact on your score. However, if you have two other credit cards, each with a $10,000 credit limit, your utilization rate is only 20% ($5,000/$25,000).
Other Things to Take Into Account
- Will you qualify? Some of the best 0% APR offers are only available to those with good credit or better, typically a FICO score of 670 and above. There are 0% APR cards aimed at those with less-than-stellar credit but the terms may be less appealing.
- Is it issued by a different bank than your current card? Most banks won’t let you transfer a balance from one of their cards to another. Even if you get approved for a card with a balance transfer offer issued by the same bank as the card you already own, you aren’t likely to be able to to shift your debt over to the new card. A way to get around this is to take a check into your bank account, which some companies allow, then pay off the other card with the funds.
- You may not get approved for the limit you want. With few exceptions, credit card issuers won’t let you know how much credit you’re approved for until after you’re approved for a card. This could be a problem if you were hoping to transfer $10,000 worth of debt or make $10,000 worth of repairs to your home but only get approved for $5,000.