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How Does a 0% APR Offer Impact Your Credit Scores?

The interest rate on your credit card or loan doesn't have a direct impact on your credit scores. However, some loans or credit cards may offer you a 0% annual percentage rate (APR) for a set period of time, which means the money you borrow won't accrue interest during that period. That 0% APR won't affect your credit either—but it could give you more money in your budget to pay down debts, which could help your credit scores.

How Does 0% APR Work?

Lenders and credit card issuers may offer you 0% APR to entice you to take out a loan, use a credit card or transfer balances to a credit card. Generally, the 0% APR is a promotional rate that only lasts a certain amount of time. Once the promotional period ends, any remaining balance will start to accrue interest based on the loan's or card's standard interest rate.

Credit Cards With 0% APR

If you get a 0% APR offer, it's probably part of a promotion for new cardholders, but sometimes you'll get a 0% APR offer on one of your current cards.

It can be helpful to think of your credit card as having different balance categories, each with its own interest rate and APR. For example, your purchases, balance transfers and cash advances could—and probably do—all have different interest rates.

Some cards offer a promotional 0% APR on both purchases and balance transfers. With others, you may receive a 0% APR on purchases or balance transfers—but not both. As a result, your purchases could accrue interest even if your transferred balances don't (or vice versa).

The 0% APR offer means the balance won't accrue interest during the promotional period. But once that period ends, the balance will start accruing interest at your standard rate.

Loans With 0% APR

Most types of loans won't offer 0% APR, but you may see 0% APR offers on auto loans from dealerships. An auto loan may be one of the largest loans you take out, perhaps behind a mortgage or student loans, so the 0% APR could save you a significant amount of money.

However, don't assume the 0% APR offer will save you more money than alternative incentives, such as a cash rebate from the dealership. Also, know that these offers may only be available to applicants with excellent credit and only if you're buying certain vehicles.

With 0% APR auto loans, you'll make monthly payments and pay off the loan without paying any interest. However, the 0% APR offer may only be available for certain loan terms, such as 36 or 48 months. This can lead to a higher monthly payment than you'd have with a 60- or 72-month term, which might make the loan too expensive even if you don't have to pay interest.

How 0% APR Can Impact Your Credit Score

Credit scoring models don't consider the interest rate on your loan or credit card when calculating your scores. As a result, having a 0% APR (or 99% APR for that matter) won't directly impact your scores. However, the amount of interest that accrues on your loan could indirectly impact your scores in several ways.

It Could Add an Account to Your Credit Report

If you're opening a new account with a 0% APR offer, the impact on your scores will be the same as if you're opening any new credit account. The new account could add to the mix of types of accounts in your credit reports, which could help your score. However, the hard inquiry noted on your credit report when the lender pulls your credit as well as the decrease in the average age of your accounts may lower your scores, though usually only temporarily.

Overall, if you're opening a new account and making on-time payments, the account may help improve your scores over time.

It Could Affect Your Utilization Rate

One of the most important credit scoring factors is your credit utilization ratio, or the percentage of available credit on revolving credit accounts that you're currently using. Opening a new card will increase your available credit, which typically lowers your utilization rate and helps your scores.

However, if you have a 0% APR offer on a credit card, you may be more inclined to let your balance grow. Your utilization rate will then increase, which might hurt your scores. In general, aim to keep your utilization rate under 30% to avoid negatively affecting your scores. For the best credit scores, try for a utilization rate of 6% or lower.

It Could Lead to Accidental Late Payments

Some people may mistakenly believe that a 0% APR loan means they don't have a monthly payment. However, you'll still need to make your monthly loan payment or minimum credit card payment to stay current. Missing a payment by 30 or more days could lead to a late payment on your credit reports, which could hurt your scores. Payment history is the most important factor in your credit scores, so staying up to date on payments is important.

How to Avoid Paying Interest on a 0% APR Credit Card

Even if you have a 0% APR offer on a credit card, you may need to plan ahead to avoid paying interest.

If your card offers a 0% APR on balance transfers and purchases for the same promotional period, figure out how much you'll need to pay each month to pay off the full balance by the end of the promotional period. Otherwise, any remaining balance will start accruing interest at the standard rate once the promotional period ends.

If your card offers a 0% APR on balance transfers but not purchases, interest could start accruing immediately if you make purchases with the card you used for the balance transfer. In general, it's best to use your balance transfer card solely to pay off the amount you transferred and use other methods of payment for new purchases. The same goes for cash advances, which should always be avoided if possible.

Additionally, with some credit cards (usually store cards), all the interest that would have accrued during the promotional period may get added to your balance if you don't pay off the card's entire balance by the end of the promotional period. While it's always best to have a plan for paying off your balance before the promotional period ends, it's especially important with cards that have this type of deferred interest arrangement.

Use 0% APR Offers With Caution

A 0% APR offer can save you money during the promotional period, but be sure to look at the big picture before taking out a new credit card or loan. It's not free money. You'll still need to repay the debt, and you may wind up paying interest if you can't pay off your loan by the end of the promotional period.

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