What Does 0% APR Mean?
In this article you are going to learn what 0% APR means, how it works, and how it can help or hinder your finances.
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Paying interest on a credit card balance is something you definitely do not want to deal with, but you can avoid with a 0% APR credit card. But do you know what 0% APR means?
0% APR credit cards can be a very useful tool for consolidating an existing credit card debt. It can also help you with large purchases.
With these cards, you have access to an interest-free period. These promotional periods can last from six months to almost two years, depending on the card you get.
During this period, you will pay no interest on purchases and balance transfers (although there may be a balance transfer fee). You must use this period wisely because, at some point, it will end.
When that happens, if you have any outstanding balance, you will start paying the card’s regular APR.
So here are a few things you should know when you come across 0% APR credit cards.
The issuer can cancel your 0% APR deal
Remember that credit is conceded based on trust. Even though you are using a 0% APR card, you are still obligated to make at least the minimum monthly payments.
If, for any reason, you delay payment, even if just by one day, your credit card issuer may cancel your 0% APR deal. This means you will be paying the card’s regular APR from then on.
Not only that. Missing payments will damage your credit score, and you will end up paying late fees and interest. Remember that your payment history accounts for 35% of your FICO score.
One excellent way for avoiding missing payments is to set up automatic payments so that you never have to even remember to pay.
Also, remember that paying minimums each month only helps you avoid late fees. Your debt will stay relatively untouched.
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The 0% APR applies to just a few things
The 0% APR most likely does not apply to everything. Most cards offer 0% APR on balance transfers or purchases, or both. However it may be worth investigating.
If you read the Schumer box, you will find a table of rates and fees specifying what you will pay in each situation. There you will probably find different rates for different things.
Most credit cards will charge a Penalty APR. This is an extremely expensive rate which you may have to pay if you fail to make minimum payments, exceed your credit limit or make payments that do not go through.
Other types of APR that are helpful to know are Purchase APR, which is the interest the issuer charges on things you buy. Some cards’ 0% APR cover purchases, others do not.
There is also Balance Transfer APR, which is the rate the issuer charges on debt that you move from one card to another.
It is worth pointing out that some cards offer 0% APR on both purchases and balance transfers.
However, it is often the case where the length of the promotional period is different for balance transfers and purchases. So check that out before you use this feature.
Finally, there is Cash Advance APR, which is the rate you pay if you withdraw money with your credit card.
This APR is usually quite high, and rarely issuers offer 0% on this kind of service.
By the end of the 0% period, you will pay interest on any balance left
There is virtually zero chance that the issuer will extend your 0% APR period. Once it is over, it is over. The issuer assumes you have had more than enough time to pay off your debt.
When the promotional period ends, the card starts working with its regular ongoing APR.
There is usually no warning once you start paying interest. Again, the issuer assumes you are in the know about where you stand.
If by the end of your 0% APR period you are still carrying a balance on your card, you will start accruing interest on it.
That will not help you with your debt, and can cost you double-digit rates.
It helps if you keep a calendar reminder of when your promotional APR ends.
Do what you can to pay off your debt by that date and avoid paying high interest.
Even at 0% APR, a big balance can damage your credit score
Credit utilization is a big part of your FICO score. It accounts for 30% of this scoring system. If you use more than 30% of your total available credit, you are in the harmful territory.
As a rule, try to keep your credit utilization below 30% of your credit limit on any card. Of course, there are times when this is impossible to avoid.
If you make a big purchase, for example, it can easily go beyond 30% in the short term. In that case, your mission is to pay off what you owe as quickly as you can.
You can accelerate your debt reduction or reduce your credit utilization by making multiple payments each month.
You may not be eligible for the offer
Yes, it is possible for you to get approved for multiple cards, even with the same issuer. However, issuers have their own limits on how much credit they are willing to extend to you.
You may get approval for 2, 3, or more cards, but the issuer is likely to cap your total credit. Also, there may be limits to balance transfers.
Besides, most issuers will not allow you to transfer a balance from one of their cards to another one of their cards.
Additionally, it is important to note that even to get a good 0% APR offers your credit must be in good standing.
0% APR periods must be used wisely. This is not a tool for you to postpone paying debt, but rather to use in your favor to eliminate debt. Use it wisely, and get your financial life under your control.
And if you’d like to find one of these advantageous credit cards for yourself, check our list of the best credit cards with 0% Intro APR.
About the author / Danilo Pereira
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