A 0% APR is essentially a credit card offered by credit card companies to their consumers with an 'annual percentage rate' (APR) of zero percent. However, this rate does not exist forever, and after a period that ranges between three to twelve months, credit card companies begin charging higher rates of interest. Therefore, the major factors to be considered are the duration of the no-interest period, and what would be the APR rate after the offer ends.
Advantages of owning a 0% APR Credit card:
Though 0% APR credit cards have a few catches, they can also prove to be advantageous for its users. The best way to assess these cards is by actually using one. If you pay off the monthly balance regularly, then the rate of interest will not be a major concern. Some of its main benefits are as follows:
- Cut down the interest rate: A 0% APR credit card is popular among users with heavy outstanding card balances. It helps them to slash the rate of interest incurred upon their debt.
- Travel benefits: A 0% APR credit cards offer travel benefits to its users. You could profit from this card if you travel by air frequently. Most companies provide bonus air mile benefits on APR credit cards. This could be as much as twenty-five thousand miles, merely by signing up and making your first purchase from this card. The travel facility could also be used for hotel rooms, meals and other additional alternatives. It also provides you with free gas discounts and rebates in purchasing a car.
- Cash back or reward benefits: Low APR credit cards also provide a system where you could get back a percentage of your purchases. You could get a reward of five percent for certain kinds of purchases you make.
- Paying off debt: Transferring your credit card balance that needs to be paid off to a new credit card with 0% APR would be a better money- saving solution, than holding on to the old card with a high rate of interest.
- Start up a new credit history: A 0% APR credit card can be used to establish a new credit history for a cardholder with a previous credit card debt. These cards curb the credit card usage, and initiate the necessity of spending within the budget. However, it might not be issued to people with a bad credit history.
Limitations of 0 percent interest APR credit cards:
A 0% APR credit card often comes with strings attached. Some of the major limitations are as follows:
- Usually, a 0% APR credit card offers the no-interest benefit for only a limited period, such as six months to a year. - It might not allow you to transfer balances from high interest credit cards during the introductory 0% offer period. - It could charge expensive fees for the process of transferring the balance. - Some of these credit cards bear very high penalties for late payments, and automatically transfer you to an inconsistent APR rate. - It often charges a very high interest rate once the initial offer period expires.
Therefore, although 0% APR credit cards may seem too good to be true, they do have a number of real advantages. While these promotional offers by credit card companies are useful, they need to be taken up judiciously.
Just be careful that they don't take advantage of you. There are a few tricks you should watch out for.
1. Balance Transfer Fees
These can add up quickly, but they're the only way to get your balance on a regular credit card over to your new 0% offer. These are often around 3%, and many companies have removed the cap. This means that while once your maximum balance transfer fee would be perhaps $75, now it can be much higher. A $5000 balance transfer at 3% means you'd be paying about $150.
That's not necessarily a bad thing. You just have to figure out if an immediate 3% is more than you'd be paying in interest over time. If you're paying it down quickly enough, and your current interest rate is low enough, you may be better off leaving well enough alone.
Do your math before you move your balances around.
2. Time Limits and Regular APR
How long do you pay 0% for? If you're not going to have the money paid off by then, once again you need to compare with what you would be paying.
If you get 0% APR with a 3% balance transfer fee and a 17% APR after the introductory period, take a look at what you're paying now. If it's the same or higher than the 18% of the new card, you definitely have a good deal. But let's see what happens to $5000 over 2 years for a 10% interest rate versus the 0% going to 18%. Minimum payments, no new charges.
After 2 years at 10%, you would still owe $3,340.29, assuming you paid 2.5% of the outstanding balance each month.
It's a bit trickier with the 0% card. You have to start by adding the 3% balance transfer fee, or $150 for a $5000 balance. Once again, making minimum payments only, that's a balance of 3800.69 at the end of the first 12 months. At the end of the 2 year period, you would still owe $3,368.87... nearly $30 more than if you had stayed with the lower APR card you originally had.
Of course, you can greatly improve this situation by making higher payments. Pay $200 a month throughout, and the 0% APR card goes to $679.71 at the end of 2 years... almost paid off. The original card is also in good shape, at $812.54, but you've paid significantly more in interest.
So think about your payment habits beforehand.
3. Increasing Your Limit
This is one of those little things credit card companies do to try and get you to spend more money. They know that many people consider their credit card limit to be a part of their available money, and so an increased limit is a license to spend more.
Don't.
Most 0% APR cards do that for balance transfers only, not purchases. While you're paying down the transfer amount, the rest is steadily increasing. If this rate is higher than your old credit card had, you're paying out more.
So just ignore that increased limit and do your best to keep your spending habits under control. This is not an easy thing for most people, but it's probably the most important financial skill you can pick up.
Both Joseph Kenny & Stephanie Foster are contributors for EditorialToday. The above articles have been edited for relevancy and timeliness. All write-ups, reviews, tips and guides published by EditorialToday.com and its partners or affiliates are for informational purposes only. They should not be used for any legal or any other type of advice. We do not endorse any author, contributor, writer or article posted by our team.
Joseph Kenny has sinced written about articles on various topics from Credit Cards, Debt Consolidation and Credit Cards. Joseph Kenny writes for the Card Guide, a site, visit today for introductory. Joseph Kenny's top article generates over 550000 views. to your Favourites.
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