How Does 0 Percent Interest on a Credit Card Work?

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Zero percent interest on a credit card is an introductory rate that typically applies for a year to 18 months, according to the myFICO website. Some banks apply this rate only to balance transfers, while others apply it to purchases. Because terms differ, some cards offer a much better deal than others.

Transfer Fees

Most 0 percent interest cards charge a balance-transfer fee, 3 percent on average, according to Bankrate.com. Some cards cap the fee -- at $75, for example -- while others don't. If you receive a high-fee offer, call the bank and ask for a better deal. According to Forbes, a few 0-percent cards don't charge any transfer fee at all.

How 0-Percent Applies

These cards also differ in how they apply the 0-percent rate. In some cases, the special rate applies only to balance transfers. Other cards allow you to charge one new purchase at 0 percent, but then additional purchases are subject to interest.

When you make a monthly payment, most banks apply it first to the 0-percent balance before they reduce the debt that requires interest. In this case, you must completely pay off your 0-percent debt before payments apply to other charges, according to myFICO.

The Disappearing Grace Period

Most credit cards don't charge any interest if you pay off your bill completely each month before the due date. This interest-free period from the closing of the billing cycle to the due date is called a grace period.

With 0-percent cards, purchases could be subject to interest charges immediately, without any grace period, if the 0 percent applies only to balance transfers, according to the Consumer Financial Protection Bureau. The same is true if you make a second purchase on a card that allows only one interest-free new charge. To avoid paying interest on new charges, you must pay off the entire balance, including the promotional balance, before the due date. If you don't, you'll probably lose your grace period.

A Bankrate.com survey found that almost 50 percent of no-interest cards offer a sign-up bonus, such as cash back or miles. You must typically spend a certain amount to earn the bonus. If you make the necessary purchases, you'll lose your grace period unless you pay off the card entirely each month.

Tip

  • Avoid interest charges by not using your 0-percent card for new purchases until you've completely paid off the promotional transfer or charge.

When the Promotion Expires

When the no-interest period is up, your entire account balance will be subject to interest. The rate that applies to any portion of your balance transfer that's still on the card may be different from the rate for other charges, according to the myFICO website. If your credit deteriorates during the introductory period, the bank may increase your interest rate.

Tip

  • Pay off the promotional balance before the end of the 0-percent period to avoid paying interest on it.

Credit Requirements

Even if you receive a 0-percent credit card offer, you may still have to qualify for the card:

  • You're likely to receive approval if you have a FICO score of 720 or higher, according to the Money Under 30 website.
  • You'll have the best chance of approval if you're using less than half the limit on your credit cards.
  •  You may be approved with a FICO score between 660 and 720.
  •  Approval is unlikely with a score under 660. (Ref. 5)
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