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), 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:
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 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 interest.
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.
Watch Out for Balance Transfer Fees
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.