As the credit card business becomes more competitive, consumers are winning.
New and improved cards now offer 0% intro APRs for purchases and/or balance transfers during the first 12 to 21 billing cycles. These cards can be an excellent way to consolidate credit card debt, avoid interest on existing credit card balances, or finance a major purchase by breaking it down into smaller monthly payments.
Before you apply for a 0% intro APR card, here are three things you should carefully consider.
1. Do you really need 0% interest?
Being able to borrow money at a 0% interest rate, even if only for a short period of time, can be a huge advantage, but only if you really need to carry a balance. A 0% APR promo is but one credit card perk, and if you don't intend to carry a balance, other cards that prioritize rewards or other features may be better for you.
There are a few instances where using a 0% interest credit card does make a lot of sense:
- Transferring a balance -- Moving a $5,000 balance at an 18% APR card to a 0% intro APR card can save you as much as $620 in interest over the promo period. To put that in perspective, only one sign-up bonus card offers that much value upfront, and extracting it requires jumping through more hoops. If you have credit card debt, a 0% intro APR card is the way to go.
- Financing a major purchase -- If you notice water running down the walls of your home, you might need a new roof, and soon. A 0% purchase APR card can be a great way to break up a major purchase into 12 or more digestible monthly payments without paying a dime in interest.
As with most things in personal finance, it really comes down to needs vs. wants. For someone with credit card debt, a balance transfer card satisfies a need for a lower interest rate. Likewise, a 0% purchase card satisfies a need for someone who will soon pay for an unexpected major purchase, like a new roof on a home. But if you want a 0% APR card to...say, finance a trip around the world, you might want to reconsider whether or not a credit card is more temptation than a financial tool.
2. Does the card charge retroactive interest?
The fine print really matters. A number of 0% APR offers aren't really 0% APR offers.
General purpose credit cards (read: cards that can be used anywhere, not in just one store) are usually true 0% APR cards. During the promo period, you won't be charged a penny of interest on your balance. However, any balances that are carried beyond the promo period will begin to incur monthly interest charges. Thus, a 12-month 0% promo offer will start accruing interest on the remaining balance starting in the 13th month.
On the other hand, store cards are notorious for offering 0% intro APRs that allow the card company to charge retroactive interest if balances are not paid in full during the 0% promo period. One hardware chain's retail card advertises six months of 0% interest, but with the caveat that "interest will be charged to your account from the purchase date if the promotional purchase is not paid in full within six months." Thus, unless you pay off the balance in full during the 6-month time frame, all the interest you avoided on your balance will appear on the statement after the promo period ends.
The difference is substantial. True 0% APR cards do not ding their cardholders with retroactive interest if they happen to carry a balance beyond the promotional period. Many quasi-0% intro APR cards charge retroactive interest, most commonly 0% intro APR store credit cards.
We've taken note of the practice. Not one card on Fool.com's list of the best 0% intro APR cards or best balance transfer cards charges retroactive interest. That said, always read the fine print when applying for any 0% intro APR card, if only because it's good practice.
3. Can you avoid a balance transfer fee?
There are plenty of 0% intro APR cards for balance transfers, but they're not all equal. Some offer 0% interest and zero fees on balance transfers for 12 billing cycles. Others offer 0% interest for 18 billing cycles or more, but charge a 3% to 5% fee to transfer a balance.
As a general rule, shorter 0% promo APR periods are more likely not to have balance transfer fees, while those with longer 0% promo APRs are more likely to have a balance transfer fee.
It's my opinion that the best card is one which has the lowest balance transfer fee, not the longest repayment terms. Consider a scenario in which a cardholder has a $5,000 balance they wish to repay over 18 months at a 0% interest rate.
There are two ways to avoid interest on this $5,000 balance:
- Transfer the balance to a card that offers 18 months of 0% interest and pay a 3% fee on the transfer. This would cost the cardholder $150 in finance charges to secure a 0% interest rate. The advantage is simplicity -- just one card does the trick. The downside is the cost of the balance transfer, which amounts to $150 (3% fee multiplied by the $5,000 balance transfer).
- Transfer balances to a card that offers 12 months of 0% interest, and pay down the balance. At the 11-month mark, transfer any balances to another 0% intro APR card with no balance transfer fee. The cardholder pays nothing in interest or balance transfer fees, but it comes at the cost of having to open two cards roughly one year apart, rather than just one card.
The primary difference here is avoiding a $150 fee by opening two cards to create your own longer intro APR period.
Many of the best balance transfer cards offer 0% interest on balance transfers for 15 billing cycles or more, and do not charge a fee on transfers that are completed in the first 45 or 60 days after account opening. Given how many cards exist today, there are plenty of opportunities to link several 0% intro APR periods together to extend the time you have to repay balances without incurring interest charges.
Winning the 0% promo APR game
Credit cards are financial tools, nothing more. Used responsibly, they offer more fraud protection and rewards than debit cards or cash. Used incorrectly, they can lead to piles of debt at eye-popping interest rates.
Admittedly, credit cards aren't for everyone. But for those who are diligent with their finances, and who can really use a 0% introductory period, a 0% intro APR card offers more value than even the best rewards cards on the market today.