Like a power tool, a 0% APR credit card can be extremely helpful and save you money if you know how to use it. But if you go in without a plan and safety goggles, it can end disastrously.
So how does 0% APR work, exactly? How much can it save you? What are the benefits of a credit card offering 0% APR, and what are the hidden drawbacks that you need to watch out for?
What is APR?
Starting with the basics, APR is an acronym for Annual Percentage Rate. It’s essentially the interest rate PLUS any hidden lending fees lumped together into a single percentage.
The reason we use APR instead of the regular interest rate is to create transparency for the borrower. Among many other things, the Truth in Lending Act (TILA) prevents lenders from advertising low interest rates only to hammer you with hidden fees after you sign the loan documents.
Instead, the use of APR forces lenders to bake the interest rate and hidden fees together so they can’t bamboozle you later. That said, they can still charge fees for late payments, balance transfers et al, but they can’t charge you more than the advertised APR for simply borrowing money.
In short, APR is the “bottom line” or “out-the-door” price of a loan, expressed as a percentage.
How does 0% APR work?
When a lender offers you 0% APR, they’re essentially letting you borrow money for free. As long as you make the minimum monthly payments on your debt, the rest of your balance won’t generate interest for as long as the 0% APR period lasts.
To illustrate, let’s say you apply for a credit card offering 0% APR for 18 months. Shortly after getting the card in the mail you buy a $5,000 couch.
Under normal circ*mstances, your credit card issuer would expect you to pay off the full $5,000 balance within one statement period. Any dollar you don’t pay off will be subject to the regular APR, which is sometimes as high as 29.99%.
But since you have 0% APR, all you have to do is make the minimum monthly payments on your remaining balance. That’s usually around 2% of the total balance of the card, so you’d owe $100 after the first month. Plus, the remaining $4,900 balance wouldn’t generate any interest.
Then, as long as you paid off the full $5,000 by month 18, you wouldn’t owe a dime in interest.
Does 0% APR on a credit card mean no monthly payment?
No. This is a common misconception about 0% APR that ends up getting a lot of folks in trouble.
In truth, all credit cards require a minimum monthly payment of around 2% of the total balance. If you miss even one monthly payment, your card issuer may cancel your 0% APR, apply a penalty APR as high as 29.99% and report your missed payment to the credit bureaus, which could instantly lower your credit score by as much as 100 points.
As a result of a single missed payment, you could be looking at 29.99% APR on a $5,000 balance that you can’t afford, and a shattered credit score that disqualifies you from a personal loan to help pay it off.
So don’t miss a payment!
What happens when 0% APR ends?
When your 0% APR period ends, your card issuer instantly switches to your regular APR and applies it to your outstanding balance.
Let’s say you have $2,000 of your $5,000 balance remaining on your card at month 18. Your regular APR is 23.74%, which means that on your next balance, you’ll owe $2,000 plus roughly $40 additional in interest.
If you can only make the minimum payment ($2,040 x 2% = $40.80), your remaining balance will still be nearly $2,000 and $40 in interest will accumulate again next month. That’s how so many folks end up in a debt cycle, and why it’s so critical to pay off your balance in full before 0% APR ends.
How much can 0% APR save you?
When wielded with care, 0% APR can save you hundreds, sometimes even thousands in interest payments.
To illustrate, let’s circle back to our $5,000 couch (which, for that price, better be made with Italian leather).
Anyways, if you put that couch on a credit card offering 0% APR for 18 months, you could make monthly payments averaging $5,000 / 18 = $277.78 and fully pay off your couch before the 0% APR period ended.
By contrast, let’s say you put the couch on a credit card with 26.49% APR and kept the monthly payments the same ($277.78). In that case, it would take you an extra six months to fully pay off the couch – and you’d pay an extra $1,442.52 in interest alone.
To recap, 0% APR can be a massive cost-saving tool – but if wielded incorrectly, it could be devastating to your personal finances that could put you in a downward debt/credit spiral taking years to recover from.
So before you apply for that sweet 0% APR card offer, let’s look at the biggest hidden drawbacks.
What are the disadvantages of 0% APR?
0% APR is a mostly-safe money-saving tool if you use it well, but if you don’t know the dangers, it could leave you in a financial mess. Here are the pitfalls and potential drawbacks to consider.
1. When the promo period ends you could be hit with massive fees and interest
We already covered the first major drawback to 0% APR above; when the promotional period ends, it really ends and there’s no soft landing. Your credit card’s regular APR will immediately apply to your remaining balance, and if you can’t fully pay off your card next month, the interest will continue to accumulate at a rapid rate.
To illustrate, let’s pull down that earlier example: you have $2,000 left on your card, 0% APR just ended and regular APR is 23.74%. You just lost your job, so the best you can do is $80 per month for a while. At this rate, it would take you another 2 years and 11 months to pay off the remaining $2,000, along with $786.59 in interest. And again, if you miss any of those minimum payments, you could be hit with penalty APR (29.99%) and instant fees from your card issuer.
2. 0% APR may not apply to everything
Credit cards can have up to four different APRs, and a 0% APR period typically won’t apply to all of them:
- Purchase APR
- Balance Transfer APR
- Cash Advance APR
- Penalty APR
In most cases, 0% APR applies to new purchases only. Sometimes it extends to balance transfers (discussed below), but we’’ve never seen a case where promotional 0% APR applies to cash advances or penalties. As a result, it’s best not to assume that every service your card offers will be interest-free.
3. You’ll still be charged a fee for balance transfers
If you’re looking to move credit card debt from a high-interest card onto your new 0% APR card, also known as a balance transfer,you should know that fees for balance transfers still apply.
In most cases, a credit card balance transfer fee is the greater of $5 or 3% of the transfer amount. So if you purchased the $5,000 couch on a previous, high-interest card and are looking to move that debt over, the fee would be $250.
But from that point forward, at least you’d have 0% APR on the debt you moved over. Just be sure that you keep making minimum monthly payments, and that the card you move the balance to is offering 0% APR on balance transfers – not just purchases.
4. 0% APR can hurt your credit – even during the promo period
Your credit score is like your personal finance GPA, showing lenders who experienced and trustworthy you are with money. Higher scores mean better loan terms with lower interest rates, which can save you gobs on personal loans, auto loans, and especially mortgages.
Monitoring your credit score is an essential part of adulting, because oftentimes you’ll find dings and dents from sources that you didn’t even realize would have an impact.
Case in point, carrying a balance of $2,000+ on a 0% APR credit card could negatively impact your credit, even if you end up paying it in full before the promo period ends. That’s because high card balances affect your credit utilization ratio, which makes up 30% of your overall credit score.
Also known as Amounts Owed, your credit utilization ratio is your current balance divided by your credit limit. So if you carry a $3,000 balance on a 0% APR card with a limit of $6,000, your ratio is 50% and “30% is the point at which it starts to have a more pronounced negative effect on your credit score”, says credit bureau Experian.
Temporarily carrying a high credit utilization ratio on a single account won’t have a huge impact on your credit score, especially if you have other accounts with lower ratios to balance it out, but it’s something to consider if you need to maximize your credit score before applying for a much larger loan.
5. You may get approved for a lower limit than expected
In a similar vein to #3, your overall credit limit on your 0% APR card may not be as high as you were hoping or expecting. Credit limits (i.e. the max you can put on the card) can range anywhere from $2,000 to $15,000+ depending on the bank, card, and the applicant’s income, job and credit score. Middle-income earners with credit scores below 670, for example, may see credit limits initially set at $7,000 or lower.
As a result, you might be hoping to put $8,000 worth of expenses on a new 0% APR card, only to apply and discover that the card issuer set your spending limit at $5,000.
6. You still have to make minimum monthly payments during the 0% APR period
As mentioned, 0% APR doesn’t mean no payments, it just means no interest. That makes 0% APR credit cards a little different from other forms of 0% APR loans (e.g. auto, personal) since the latter may not require any payments at all until the 0% APR term expires.
With credit cards, however, you still need to make payments of roughly 2% of your total overall balance each month, and if you miss a payment, the effects could be catastrophic.
7. Missing a single payment could devastate your finances
Credit card companies aren’t typically very forgiving if you miss a monthly payment. In fact, it’s usually quite the opposite of forgiveness.
To illustrate, the Citi® Diamond Preferred® Credit Card is one of the strongest 0% APR cards on the market, offering 12 months for purchases and 21 months for balance transfers.
However, deep inside the fine print, Citi warns that “We may end your introductory APR and apply the Penalty APR if you make a late payment.” That means one single misstep could lead you to a $41 late payment fee and an eye-watering 29.99% APR on whatever balance remains.
In addition to spiraling high-interest debt, your credit score will take a beating from your missed payment and your rising credit utilization ratio. As mentioned above, that could make it hard to apply for a debt consolidation loan, and the spiral continues.
That’s why we can’t stress enough that a 0% APR deal can go very, very badly if you don’t have a strict and realistic payment plan in place. If you do, however, it can go just fine and save you oodles on interest.
Bottom line: Is 0% APR worth it?
A 0% APR credit card is absolutely worth applying for if you could benefit from a year or more of no-interest payments. Just be sure to keep every possible pitfall in mind, and have a clear and realistic payment plan in place to ensure you don’t end up with high-interest debt when the promo ends.
For more on how to use 0% APR effectively, check out What to know before using an introductory 0% APR card in an emergency.
Please note that card details are accurate as of the publish date, but are subject to change at any time at the discretion of the issuer. Please contact the card issuer to verify rates, fees, and benefits before applying.
