How does a 0 (zero) interest credit card work?
A 0 (zero) interest credit card works to help you pay off a balance or large purchase by extending introductory 0% APR for a set amount of time, typically between 12 and 18 months. This lengthy interest-free window allows you to make payments without incurring extra costs.
For instance, if you were paying $250 a month toward a $3,000 balance on a 15% interest card, it would take you about 14 months to pay it off and cost an extra $268.59 in interest. However, with an interest-free credit card, you could make the same $250 payment a month and pay off the balance in 12 months without paying any extra interest. You can use our debt payoff calculator to explore how different interest rates may affect your debt and payments.
The key is to have a plan to pay your balance off in full before the extended 0% APR period ends. Additionally, you’ll want to keep an eye on balance transfer fees to ensure they won’t cost you more than you’d pay in interest on the original card.
What are balance transfer fees and APR rates?
Balance transfers are among the common reasons for obtaining a low-interest credit card, so APR and its corresponding fees are other key factors. During the introductory 0% APR period, most of the recommended low-interest cards offer 0% APR on balance transfers and purchases. And during the introductory period and after, most of the cards also charge a balance transfer fee. This fee is usually a percentage or set amount — for instance, either $5 or 3% of the transfer amount, whichever is greater.
What is APR and how is it determined?
Credit cards’ interest rates — the price you pay for borrowing money — are generally listed as a yearly rate or annual percentage rate (APR). Upon examining the terms and conditions of each card, you’ll notice that within each APR category, there are often several potential percentages listed, and those percentages are wide-ranging. That range of numbers represents the interest rates you may be charged based on your credit score. In general, the better your credit score, the lower your APR.
Generally, credit card companies calculate their variable interest rates based on the Federal Reserve’s Prime Rate. You should also know that according to 2009’s Credit Card Accountability, Responsibility, and Disclosure Act, your credit card company must notify you 45 days in advance of changing the terms of your agreement, such as updates to interest rates and fees. You must have the opportunity to cancel the card before changes go into effect.
The bottom line
If you have some debt you want to pay off or plan on making a large purchase soon, a low-interest credit card with 0% APR may be an option to give you a longer period of time to make payments without incurring extra costs. The two most important things to consider are the balance transfer fees and the extended APR period. Make sure that the fee is less than you’ll pay in interest on your current card and that you have a plan to pay off the debt or the purchase within the set interest-free timeframe.