American ExpressAmerican ExpressAmerican ExpressAmerican ExpressAmerican Express
United StatesChange Country

How Do 0% Credit Cards Work? 

A low or zero interest credit card can save you money on big purchases while that introductory rate lasts, but it takes many considerations to use them wisely.

By Allan Halcrow | American Express Credit Intel Freelance Contributor

7 Min Read | June 14, 2021 in Cards

 

At-A-Glance

A no interest credit card is one that charges a 0% introductory APR during a promotional period, typically six to 12 months. After that, the rate converts to the card’s standard APR and interest charges accrue on any balance if not paid in full. 

These cards can save you substantial money, especially if you have a specific goal and plan to pay off the balance before the promotional period ends.

The specific terms of zero interest cards can be complex and may include a variety of fees. The creditor may also end the promotional period early if you violate the terms of the agreement.

You’re most likely to get approved for an interest free card if you have excellent credit. If you don’t, you may be approved for a lower credit limit than you want – or not get approved at all.

No or low interest credit cards are not necessarily no-brainers. Sure, they sound simple – you charge purchases to your card but pay zero interest for an introductory promotional period that usually lasts a few months or a year. And it’s true that, used wisely, interest free credit cards can save you money, especially on large purchases or balance transfers. Let’s look at how 0% introductory APR credit cards work and what using them wisely means.

 

Choose an Interest Free Card That’s Right for Your Goals

Should you get a zero interest credit card? The answer may be “yes” if having one helps you meet a specific financial goal. Some good reasons include:

  • You want to pay down high-interest debt by transferring the balance to a 0% intro APR credit card so that 100% of your payment goes toward the principal.
  • You want to make a major purchase – perhaps a big-screen television – and don’t have the cash in the bank. A no interest card can effectively finance it for free if you pay it off during the introductory period.
  • You want to have a safety cushion to protect you from draining cash reserves or scrambling to find the cash in an emergency, such as suddenly having to replace a major appliance.
  • You want to get a 0% interest rewards credit card to earn a large stash of points before the card starts charging interest.


Other things to keep in mind as you define your goals:

  • Most of these cards offer temporary 0% interest promotions on purchases or balance transfers but not both, so you’ll likely have to choose. And it’s very rare to find 0% interest extended to cash advances.
  • If you’re in the habit of paying your credit card balance in full each month, no interest credit cards don’t offer any benefits you aren’t already getting. You may be better off focusing on a rewards credit card.
  • Beware of sacrificing one goal for another. For example, remember that 30% of your credit score is based on your credit utilization ratio – the portion of your total available credit that you owe at any given time. If you make a big purchase that maxes out your new card, you’ll likely lose some points off your credit score. Only you can decide whether the trade-off is worth it.

 

Pay Off the Balance on Your 0% Interest Card During the Intro Period

Whatever your goal, credit cards don’t offer 0% interest forever – at some point, they convert to standard credit cards and begin charging interest on any remaining balance. Because of that, using these cards successfully can require a lot of discipline. Without it, there is less advantage to a 0% interest card, and you may end up spending more and staying in debt longer.

  
For example, it’s generally wise to avoid making a large purchase with the card and merely hoping you can pay it off before the card starts charging interest. And unless you have a very small balance, it’s usually best to avoid simply paying the minimum due each month. Instead, grab your calculator and figure out how much you’ll need to budget each month to pay off the balance during the introductory period. For example, if your card offers 12 months of 0% interest and you transfer a $5,000 balance, you’ll need to budget about $417 per month.


Finally, it may be easier to budget if you use the card for specific, planned purchases rather than pulling it out every time you stop for gas or tacos. In other words, it’s easier to manage a fixed balance than a moving target.

 

Read the Fine Print on Your No Interest Credit Card Deal

Creditors market numerous 0% interest credit cards, but they are not identical. That’s why it’s important to be sure that you fully understand the card’s terms and know exactly what you’re getting into. Here are some things to look for:

  • When is the honeymoon over? No matter which card you choose, sooner or later the 0% interest period will expire and you’ll start being charged interest. By law, that period must be at least six months,1 but 12 months is more common and some cards offer as many as 21 months. Finally, don’t skim the fine print and assume the number you see specifies months – some cards measure the 0% interest period in billing cycles. That distinction results in a shorter interest-free period – 18 billing cycles is typically 15 months, for example.
  • When you start paying interest, how much will it be? When the promotional 0% interest period ends, you’ll likely face double-digit interest – the average in early 2021 was nearly 16%.2 But generally, the lower your credit score, the higher the interest you’ll likely pay – perhaps as much as 25% or more. Be careful that you don’t end up paying higher interest for the long term to enjoy short-term savings.
  • Are you really getting 0% interest? Or just deferred interest? Let’s say you got a 0% interest credit card and transferred a $2,000 balance to it. At the end of the promotional period, you still have a $400 balance. A true 0% interest card will begin charging interest the first day after the promotional period and only on the $400. A deferred interest card will now charge interest on the full $2,000 balance and for the entire length of the promotional period, retroactively. You won’t have saved anything.
  • What fees are you paying? The good news is you aren’t racking up interest charges. The bad news is you may be racking up fees. These could include an annual fee, balance transfer fee (typically 3%-5% of the balance), foreign transaction fee, and late payment fee. Specific fees may or may not apply to you, but you don’t want to be surprised.
  • If you’re not careful, might the deal be called off? Some interest free card agreements permit the creditor to end the promotional interest free period earlier than scheduled if, for example, you exceed your credit limit or make a late payment, even by one day. To keep that from happening, it’s a good idea to pay careful attention to what you charge and set up automatic payments – or set a reminder on your smartphone – so you don’t miss a payment.

 

You May Not Get Everything You Want

Even if everything about a no interest credit card sounds great, you may not always get what you want. Here’s why:

  • Your credit history matters. As with many things in life, good credit pays off. Usually, if your credit score is 700 or better, you’re most likely to be approved. But if your credit is fair or poor, you may not qualify. If your score is fair, between 630 and 689, try applying through a credit union or a bank with which you already have a relationship. If your score is less than 630, you may not be able to get a no interest card.
  • All cards have limits. The 0% interest credit card issuer has the right to determine how much credit to extend, and it may not be as much as you want. Typically, you won’t find out what your credit limit is until after you’re approved. As my grandmother used to say, don’t count your chickens until they’re hatched.

 

The Takeaway

Used wisely, 0% interest credit cards might potentially save you a lot of money. But to do that, you’ll want to set a financial goal, commit to paying off the full balance during the no-interest promotional period, and read the fine print of the agreement to be certain you understand what you’re getting into.

Allan Halcrow

Allan Halcrow is a freelance writer concentrating in business, human resources, and diversity and inclusion. He is also the author of four books on management.

 

All Credit Intel content is written by freelance authors and commissioned and paid for by American Express. 

The material made available for you on this website, Credit Intel, is for informational purposes only and is not intended to provide legal, tax or financial advice. If you have questions, please consult your own professional legal, tax and financial advisors.