If you decide to apply for a new credit card, you may come across an offer with a “0% APR” introductory period.
Many credit cards offer 0% APR during the first six or 12 months from account opening for purchases (and sometimes balance transfers too), and this can mean some serious savings if you plan ahead.
So what exactly is this 0% APR business all about anyways? Well, put simply, it means a 0% interest rate for a certain period of time. Think of it as an incentive to get you in the door (and to spend without fear or consequence).
Let’s look at an example of a 0% APR credit card in action:
Say you spend $1,000 during the first billing cycle (month) on your new 0% APR credit card. Instead of having to pay off the entire balance within your credit card grace period to avoid paying interest, you can make just the minimum payment and pay nothing in the way of finance charges. Why? Because the APR is set at zero, so even if you carry a balance, the interest rate is 0% and thus won’t accrue any interest whatsoever. Remember, any number multiplied by zero is always zero.
However, after that promotional period is up, your credit card APR will shoot up to the standard purchase rate, which will likely be significantly higher than 0%. In fact, you could see your interest rate jump to the high teens or 20% range. Once that happens, you’ll be stuck paying interest on any balance you continue to carry over. This is “where they get you.” Credit card issuers essentially bank on you racking up debt that you can’t pay off in its entirety.
However, if you are a responsible borrower that doesn’t let your spending spiral out of control, this type of card can be very cost efficient, and allow you to leverage your money if you need to use it for other more important things, such as existing high-APR debt.
Use 0% APR Credit Cards to Avoid Paying Interest
But perhaps the biggest benefit of a 0% APR credit card is the ability to transfer balances from other high-interest credit cards. For example, why pay 20% APR on a store credit card when you can move the entire balance to a new 0% APR credit card, then slowly pay it down for 12 months with zero interest?
It makes no sense to keep paying interest when there are plenty of no-cost alternatives available, assuming you’ve got good credit.
If the 0% APR credit card you’ve got your eye on also offers 0% APR on balance transfers, you can move existing debt to the card and save a ton of money that would otherwise go toward paying finance charges. Once the debt is transferred to the 0% APR credit card, you will avoid any and all interest until the 0% promotional period ends.
This is a perfect time to make regular payments until the balance drops to $0, ideally before the introductory 0% APR period ends.
If you are unable to pay off the debt in full by the time the interest rate shoots up to the standard purchase APR, you can execute another credit card balance transfer to a new credit card, and extend that 0% interest rate for another 12 months or longer. Keep it mind that you still ultimately need to pay off whatever you spend, as the debt is simply being shuffled from one credit card to another.
All that said, there is one more thing to consider. Many credit cards charge a balance transfer fee, which is usually the greater of $10 or 3% of the transaction, though there are some no fee balance transfer credit cards out there. So even if you transfer a balance to a 0% APR credit card, you may still pay a form of “prepaid interest” upfront.
Despite the possible fee, the amount of interest you may pay if you keep your balance with a high-APR balance could greatly exceed this cost. So be sure to weigh all your options and do the math before transferring a balance.
In summary, 0% APR credit cards offer cash flow flexibility, and can help you avoid paying interest, which can result in savings of hundreds to thousands of dollars. Just realize that 0% APR credit isn’t free money, and just like any other debt, it must eventually be paid off.
If you’re looking to consolidate debt, you’ve likely seen offers from a variety of credit card companies touting various balance transfer deals. Some offer 0% APR for six to as long as 24 months, while others offer a low fixed rate for the life of the loan balance.
This is where things get somewhat tricky. You really need to assess your current credit card debt situation to decide which will help you save more money. Let’s take a look at the pros and cons of each type of offer to determine which will work best for you.
0% APR Credit Cards Offer the Lowest Rate
First off, 0% APR credit cards are certainly a good deal, as they allow a consumer to pay zero finance charges during the promotional period, which as I mentioned earlier, could be for as long as two years. But what happens after that promotional period comes to an end?
Often times, little of the debt is actually paid off and consumers find themselves scurrying to move the debt to a new credit card. And each subsequent balance transfer may result in a balance transfer fee, which is typically between $5-$75, or even more now that fees are no longer capped in many cases.
The good news is that there are 0% APR no fee balance transfer credit cards out there if you keep your eyes peeled, such as this Chase Slate card, though they’re becoming a bit of a dying breed.
Even if you do have to pay a balance transfer fee, the benefit of paying zero finance charges may outweigh the cost of a low interest rate credit card.
One final perceived negative issue with 0% APR credit cards is that consumers may be more prone to let the debt build up, as there are no related finance charges to act as motivation to pay it off. But that’s just human nature, not necessarily measurable.
Fixed Rate Credit Cards Give You More Time
That brings us to “fixed rate credit cards” and low interest rate credit cards, which above all are favored for their safe and secure fixed rate. The fact that the interest rate, or credit card APR, doesn’t change for the life of the balance transfer is a big plus, especially if you secure a super low rate. These offers typically carry no associated balance transfer fee either, which for some may be the selling point. But fixed rate credit cards do carry finance charges, which though relatively small, can add up over time.
Imagine a credit card balance transfer that offers a 2.99% fixed rate for the life of the balance. This means you can hold the balance for as long as you’d like until it is paid off, paying only 2.99% APR. That’s certainly a good deal, and much better than the standard APR on credit cards which typically falls into the teens or higher. But those finance charges can still catch up to you.
If you have a $5,000 balance on the fixed rate credit card with the 2.99% APR, you’d be paying roughly $150 a year, not accounting for accrued interest or early payoff. So even though you may have avoided a balance transfer fee, the finance charges alone would double the average balance transfer fee cost in as little as 12 months.
The American Express Clear was a credit card that offered a low fixed-interest rate for the life of the balance transfer, and carried no balance transfer fee. That offer has come and gone though…
It’s probably tempting to go after a low-interest fixed rate credit card, but you really need to do the math before you decide which offer to go with. Map out a 12-month plan (or longer) of how you intend to attack your debt. You may have a goal to pay it off in less than 12 months, or you may just want to make the minimum payment and let it ride.
I’ve tried both, and I can say that the 0% APR balance transfer is my offer of choice, though it does seem to take a bit more work than the fixed interest rate option. You have to stay on your toes, and make sure you transfer the balance before the promotional period ends to avoid costly finance charges. That also entails opening new credit card accounts in some cases, and incurring more fees. But all in all, it can be worth it depending on your debt situation.
If you do plan to execute a balance transfer, consider the offers available with your current card issuers as well. Usually their deals are just as good, if not better than other deals out there, and they can help you avoid opening a new credit account, which may harm your credit score, at least short term.