0% APR Credit Cards – Truths and Traps
If you are struggling with ever-increasing credit card debt, a 0% APR credit card could be the magic wand for you. There are a number of 0% APR credit cards in the marketplace. These offer cardholders zero percent interest on new purchases and certain card offers also allow balance transfers, lowering the interest burden even further.
The Truth About 0% APR Credit Cards
Most popular credit card lenders offer 0% APR cards. These cards have many benefits to offer if you have a good to excellent credit rating.
Keep in mind that the zero percent offered with these cards is not permanent. It is an introductory rate and is typically offered for 3 to 12 months. At the end of the interest-free period, cardholders will have to pay a higher ongoing interest rate. Generally, these rates could vary between 10% – 14% and sometimes can be as high as 24%.
A 0% APR credit card is ideal when you want to purchase something expensive but cannot find another way to finance it. There will be no interest charges and you will have the introductory buffer period to pay off the expense. But buyer beware … make sure you can pay the purchase off before the introductory APR expires.
Most 0 Interest credit cards allow balance transfers from your existing higher interest cards and many will waive the transfer fees. This is one of the best methods to pay off debts at a faster rate, leading to substantial savings on the interest charges incurred.
It is possible that a single credit card can have multiple APRs including the following:
- One APR for balance transfers, one for purchases, and one for cash advances. The APR could be higher for cash advances compared to balance transfers and purchases
- Tiered APRs – Different APR levels can be assigned for different account balance levels or tiers, e.g., 15% for balances between $1 – $500 and 17% for balances higher than $500, etc.
- Introductory APR – 0 APR as the introductory offer and a higher rate upon expiration of the introductory period.
- Penalty APR – A penalty APR rate may apply if you are late with your payments.
The Traps to Watch Out For
A 0% APR credit card is an attractive proposition and often is too tempting an offer to resist. It is essential to understand the often-untold catches in these lucrative offers. In general, the 0% APR offered is only for a limited period. The period could vary from 3 months to 12 months. This implies that purchases made during this period will not attract any interest. You need to be cautious about the expiry period and remember to pay off before the period ends to avoid hefty interest charges.
Once the introductory period is over, the card may have a ridiculously high interest rate such as 20% or higher.
On-Time Payment – Most of these 0 Interest credit cards require you to pay the minimum payment on time every month. Late payments will result in penalties that include shifting the remaining balance to a much higher APR.
Complete Payment – Certain cards require you to pay off the balance entirely before the expiration period of the introductory offer. If not, the default high interest rate could be applied to the entire balance. Ensure that you understand these credit card terms clearly.
Applicability of the 0 APR – Most of the cards offer the 0 APR on new purchases and balance transfers in the introductory period. However, there are some cards that offer 0 APR on balance transfers only with higher applicable APR’s on new purchases.
Other Fees – Some credit card companies compensate the 0% APR by charging high annual fees or transfer fees on balance transfers.
Limit on Balance Transfer – Certain cards may have a limit on the balance transfer amount. This means that the 0 APR will apply only for the amount within the limit. The default APR will apply to anything over the limit.
The Bottom Line
While it may be an attractive offer to go for 0% APR credit card, it may not be a wise decision in certain scenarios. Before you seriously consider a new credit card, it is essential to compute credit balances, interest rates, and your pay off capability. Read the terms and conditions carefully to avoid credit traps. Understanding the fine print could have substantial savings apart from trouble free credit rating.