Understanding What a 0% Apr Credit Card Means to You
0% APR Credit Cards
Ways to leverage "free" credit cards
A 0 APR Credit card is one where the annual percentage rate (APR) is not charged on the credit card balance. APR is the effective rate of interest charged against the total balance of charges on the credit card. An APR of 0 will yield 0% interest on the card balance when the balance is due. Typically, a 0 APR credit card will offer by a lender is strictly for a promotional period, usually several months. After the promotional period has ended the real APR for the credit card is applied to existing balances. By law, all lenders are required to disclose the APR, including the APR on credit cards after the 0 APR promotional period ends. The APR, in accordance with the Truth in Lending Act, is displayed in large boldface type on the first page of the credit card or loan contract. This is to protect the borrower or cardholder from unscrupulous lenders who may state a low APR and then slap the borrower with a high APR after the loan and/or credit card has been secured.
Calculating the APR
Once the 0 APR rate on the credit card has ended, it's a good idea to understand just how the new APR will affect your current and future payments. APR is essentially the total cost of credit expressed in an annual percentage rate and designed to make a comparison of credit cards easier for the consumer. Most credit card APR rates are based on nominal APR compounded monthly. Let's look at an example of calculating the APR. If a bank is advertising a card with an interest rate of 17.9%, then it must be converted into a decimal format. In this example, our value is 1.79 and is converted into 1.179. We take this value and obtain the 12th root value, which is the same as raising it to the power of 1/12. The final calculation is the yearly APR on the credit card. This method can and probably will change across banks, depending on their lending strategies and policies.
Ways to leverage "free" credit cards
But hold your breath – it’s mostly during the promotional period that cards have a 0 interest rate on them. However, you can get to make use of the free promotional duration in the following ways:
Balance Transfers (BT)
Many credit card companies will offer you a 0 percent interest rate on their balance transfers. During the ‘free’ promotion you could avoid paying interest for quite a few months! However, this scheme would make sense for you only if you had a high outstanding balance on the current card. Otherwise, you won’t be realizing much of savings. Balance transfers refer to a method of transferring outstanding balances on the current card to another credit card which is offering a lower interest rate. Usually, people go for 0 interest credit cards while doing balance transfers. This saves them a lot of money in the process. However, most companies are going to charge a balance transfer fee.
0 Interest on Purchases
Another common scheme usually employed by credit cards is to offer an introductory period of zero rate purchases. This duration can extend from either three months to even a year. While the scheme itself is great, it’s best to also have knowledge of the standard interest rate. That way you can reduce purchases once the interest rate escalates to the normal rate.
Zero interest on BT and purchases
Many companies will even offer cards that offer a zero interest rate on both balance transfers as well as purchases. This combined offer can be a very effective way to avoid paying interest on the card.
Most credit cards offer a grace period during which one is free to pay off the outstanding amount. After this date, interest starts being charged on the principal amount. Therefore by paying off your dues within the grace period, you can actually avoid paying interest on the card.
Nothing is free
As they say ‘there is no free lunch’, so also there are no unlimited periods associated with 0 interest credit cards. They are in business and need to make money too. Therefore it’s best not to get taken in by their claims of ‘free’ and ‘no fee’ cards. These are just marketing gimmicks and only valid for a certain duration.
Your credit score
If you’ve been maintaining a good credit history then chances are you will be eligible for many promotional schemes – and that also includes a 0 interest rate for a few months to even a year.
Don’t delay your payments
It can be a joyride for customers during the 0 interest promotional period. However, if you delay payments even by a day during this duration, interest rates may go back to their standard rate. Therefore be diligent in paying your bills within the due date.
Don’t keep too many cards
Many people maintain many different credit cards, which can often be a negative aspect in the long run. Too many credit cards result in being tagged as ‘having too much consumer credit’ which can lower your credit score. This, in turn, can spoil your chances of getting those promotional offers on credit cards. So be careful.
Promotional offers don’t help if you’re not diligent yourself. Things like:
- Exceeding the credit limit
- Only making partial payments
- Purchasing more than what you can afford
- Not keeping track of your credit score
All that glitters is not gold – the same goes for credit cards too. All 0 interest credit cards are not really "free".
This article is accurate and true to the best of the author’s knowledge. Content is for informational or entertainment purposes only and does not substitute for personal counsel or professional advice in business, financial, legal, or technical matters.
© 2019 Jason Nicolosi