How do 0% credit cards work?

0% APR on a credit card means that for a specific, introductory period, you will not be charged interest on certain types of transactions.¹ APR stands for Annual Percentage Rate, which is normally the yearly interest rate applied to your credit card balance.² With a 0% introductory APR, this rate is temporarily set to zero.³

 

How to Use a 0% APR Credit Card to Save on Interest:

These cards are designed to help you save money, especially if you have a clear financial goal and a plan to pay off the balance before the promotional period ends.⁴ Here’s how you can use them effectively:

 

1. Debt Consolidation (Balance Transfers):
   • If you have existing high-interest credit card debt, you can transfer that balance to a 0% intro APR card.⁵

      

   • During the introductory period (which can last from 6 to 21 months), 100% of your payments will go directly towards reducing the principal balance, rather than being eaten up by interest charges.
   • This can significantly accelerate your debt payoff and save you a substantial amount of money.⁶

      

   • Important: Be aware that most balance transfers incur a fee, typically 3% to 5% of the transferred amount.⁷ Factor this fee into your savings calculation. Also, you generally cannot transfer balances between cards from the same bank.⁸

      

2. Financing Large Purchases:
   • If you’re planning a significant purchase (e.g., a new appliance, furniture, or unexpected repair), a 0% APR on purchases allows you to finance it interest-free.⁹

      

   • You can pay off the purchase in installments over the introductory period without any added interest costs.
   • This is essentially like getting a short-term, interest-free loan for your purchase.
3. Emergency Fund Cushion:
   • While not a primary use, some people consider a 0% APR card as a safety net for unexpected emergencies, allowing them to cover sudden expenses without immediately incurring interest. However, this should be approached with extreme caution and a clear repayment plan.
4. Earning Rewards (with a Plan):
   • Some 0% intro APR cards also offer rewards (cash back, points, miles). If you’re disciplined and can pay off your balance in full each month or by the end of the intro period, you can earn rewards on your spending without paying interest.¹⁰

      

Key Considerations for Wise Use:

• Define Your Goals Clearly: Before applying, know exactly why you want the card and how you plan to use it.
• Understand the Terms and Conditions (Read the Fine Print!):
  • Which transactions qualify? Does the 0% apply to purchases, balance transfers, or both? The length of the 0% period can also differ for each.
  • How long is the introductory period? Note whether it’s measured in months or billing cycles.
  • What is the ongoing APR? This is the rate that will kick in after the promotional period ends.
  • Beware of Deferred Interest! This is a critical distinction. With a true 0% APR, interest only applies to any remaining balance once the intro period ends. With deferred interest (common on store cards), if any balance remains at the end of the promotional period, you’ll be charged all the interest that would have accrued from the original purchase date retroactively.¹¹ Always ensure you’re getting a true 0% APR offer.

     

  • Fees: Be aware of balance transfer fees, annual fees, and any potential late payment fees.
  • Early Cancellation Clause: Many agreements state that missing a minimum payment (even by a day) or exceeding your credit limit can cause the 0% APR offer to be canceled prematurely, triggering a higher “penalty APR” on your balance.¹²

     

• Pay Off the Balance During the Intro Period:
  • This is the most crucial step. Calculate exactly how much you need to pay each month to have a $0 balance by the time the 0% APR period expires. Don’t just pay the minimum, as this won’t eliminate the balance quickly enough.
  • Set calendar reminders for the end of your promotional period.
• Credit Score Impact:
  • You generally need excellent credit (typically 700+ FICO score) to qualify for the best 0% APR offers.¹³ If your credit is fair or poor, you might not get approved or may receive a lower credit limit than desired.¹⁴

     

  • Opening a new credit account results in a temporary “hard inquiry” on your credit report.¹⁵

     

  • Carrying a high balance on the card, even at 0% APR, can increase your credit utilization ratio (the percentage of your available credit that you’re using), which can negatively impact your credit score.¹⁶ Aim to keep utilization below 30%.

     

  • However, responsibly paying down debt can improve your credit utilization over time.¹⁷

     

• Always Make On-Time Minimum Payments: Even with 0% interest, you’re still obligated to make at least the minimum payment by the due date. Missing payments will lead to fees, a canceled 0% APR, and damage to your credit score. Setting up automatic payments is highly recommended.

The Takeaway:

A 0% APR credit card can be a powerful financial tool for saving money on interest and managing debt or large purchases.18 However, its effectiveness hinges on responsible use, careful adherence to the terms and conditions, and a clear plan to pay off the balance before the interest-free period ends.