Have you ever looked at a credit card application and seen an interest rate that looked too good to be true?
Many credit cards offer 0% APR financing or very low rates for a limited time. These introductory rates can be a great way to save money on credit card interest, but it's important to understand how these offers work.
The Types of Introductory Credit Card Rates
Credit card issuers have many ways of enticing you to apply for a new account, and introductory interest rates are just one way. An introductory financing can apply to new purchases, balance transfers or both, and these offers can be for 0% APR or just a reduced interest rate. By law, an introductory credit card rate must last for at least six months, but the most competitive ones will last for over a year.
However, some store credit cards offer something different called "deferred interest financing." This type of financing is not an introductory rate. Instead, the standard interest rate applies, but that amount is waived when the entire balance is paid in full before a certain time.
If you have any remaining balance at the end of the promotional financing period, then the interest charges will apply on the entire amount, from the date of purchase. Typically, deferred interest financing is offered by retailers to help customers finance major purchases.
How Your Monthly Statement Cycle Works with an Introductory Credit Card Rate
Even when you have a credit card with a 0% APR introductory rate, you will still receive a monthly statement and you'll still have to make a minimum payment.
However, you won't incur interest charges on your balance, and your entire payment will be applied against your principal. Furthermore, you could forfeit your introductory rate if you make late payments as most card issuers will apply a penalty interest rate that's even higher than the usual rate.
When your introductory rate applies to new purchases, every purchase you make will fall under this introductory rate. However, it usually won't apply to other parts of your balance such as cash advances and fees like an annual fee or late fees. The introductory rate will begin on the day your new account is opened. This will be the date that your application was approved, but not the date that your card was mailed, received, activated or first used.
If your credit card has an introductory rate for balance transfers, it will start on the day that your application was approved and your account was opened. However, you will also have to request the balance transfer.
This can be done when you apply for the card or after your account has opened, although you don't have to wait to receive your card. Just note that card issuers never allow you to transfer a balance from another card that it issued, as the goal of these rates is to acquire new balances from another card issuer.
Also, some introductory financing offers require that balance transfers be completed within a limited time of account opening, often 60 days. Finally, nearly all 0% APR balance transfer offers will require the payment of a balance transfer fee, which is often 3% or 5% of the amount transferred. This fee is added to your new balance once the transfer is complete.
How Payments Are Applied to Introductory Credit Card Rates
When you have an introductory financing rate on your balance transfers or your new purchases, but not both, it's important to understand how your payments will be applied. The CARD Act of 2009 requires that any payment beyond the minimum be applied first to the balance with the highest interest rate.
That means that once you've made the minimum payment on both your new purchases and your balance transfer, the additional payment will apply to the one that doesn't have a promotional financing rate. This law is good for credit card users as it minimizes the interest that you will be charged.
How to Save the Most Money with Introductory Credit Card Rates
When you apply for a new credit card to use an introductory financing offer, your goal should be to avoid paying interest charges on your purchases, not just to postpone the expense. To do this, you should make it your goal to pay off your entire balance before the introductory rate expires and the standard rate applies.
For example, if your new credit card offers 15 months of introductory financing on balance transfers, then you should do your best to pay off at least one-fifteenth of your remaining balance each month (or more, if possible).
If you do this, then you will avoid interest charges completely while paying off your entire outstanding balance. With 0% APR financing on new purchases, you'll also want to manage your purchases with the goal of paying off your balance before the standard rate applies.
Although introductory credit card financing can allow you to avoid interest charges, you should remember that your balances will be reported to the major consumer credit bureaus as debt.
If you have a high amount of debt relative to your total amount of credit extended (known as your credit utilization rate), it can hurt your credit scores until you pay it off. In general, credit experts recommend that you keep your debt below about 30% of the amount of credit you have extended, although there's nothing magical about that number.
By understanding how introductory credit card rates work, and how best to use them, you can save money on credit card interest charges by paying off your balance even faster than you might have thought.
Editorial Disclaimer: Opinions expressed here are author's alone, not those of any bank, credit card issuer or other company, and have not been reviewed, approved or otherwise endorsed by any of these entities. All information, including rates and fees, are accurate as of the date of publication.