Wouldn't it be great if you were able to use your credit card to borrow money without paying any interest? That's the appeal of credit cards that offer 0% APR financing on new purchases, balance transfers or both. And while some people dismiss these offers as too good to be true, they can actually be an effective way to save money on interest charges while paying off your debt.
The Basics of Interest Free Promotional Financing Offers
Many credit cards offer new applicants 0% APR financing on new purchases, balance transfers or both. These offers apply to new accounts for a limited time, which must be at least six months to comply with the CARD Act of 2009. However, the most competitive offers will last for at least 15 months.
There are two types of promotional financing offers, and it's important to understand the difference. The most common type are the 0% APR offers available on many credit cards when you open a new account. When one of these offers applies to your new purchases or balance transfers, there are no interest charges being accrued during the promotional financing period. With this type of promotional financing, the standard interest rate will only begin to apply to your remaining balance once the promotional rate ends.
A less common type of promotional offer is called deferred interest financing. Deferred interest financing is sometimes offered by retailers to help their customers finance large purchases such as furniture, electronics and appliances. Deferred interest financing is often marketed as "same as cash" if paid within the promotional financing period.
With deferred interest financing, interest begins to accrue on your charges starting on the date of purchase, and it can be waived only if the entire balance is paid before the end of the promotional financing period. Pay just a day late, or only a few dollars short, and you will still have to pay all of the interest charges that have accrued since you made the purchase. This contrasts sharply with actual 0% APR financing that doesn't charge interest until the promotional period expires, and then only on your remaining balance at that time. As a result, customers need to be very careful when making purchases with deferred interest financing commonly found on retailer's credit cards.
How 0% Offers on New Purchases Work
When a credit card offers 0% APR financing on new purchases, that's the interest rate you will receive during the promotional financing period. However, this rate will only apply to new purchases, and you could have other balances with other interest rates. For example, you could also have a balance transferred from another account, which may not receive a 0% promotional rate. And if you use your credit card at an ATM, then you will have a separate cash advance balance, with its own interest rate.
Even when 0% APR applies to your new purchases, you'll still have to make a minimum payment each month. If you fail to make at least the minimum payment, your credit card issuer could impose a penalty interest rate, which is higher than the standard interest rate.
Also, you should be aware that when you make the minimum payment, it will only be applied to the balance with the lowest interest rate, such as a promotional rate. But when you make a payment in excess of the minimum amount, the additional funds will be applied to the balance with the highest interest rate, which could be a balance transfer or a cash advance.
How 0% Offers on Balance Transfers Work
Interest free financing on balance transfers works much like it does for new purchases. The biggest difference is that nearly all credit cards that have 0% APR financing on balance transfers also charge a balance transfer fee. The balance transfer fee for most cards is 3% of the amount transferred, although some cards will charge 5%. The amount of the fee is added to the balance transferred, and will be subject to interest charges if not paid off before the promotional financing period ends. Finally, you should be aware that these offers are designed to get you to move your existing balances from another card issuer. Therefore, you can't transfer a balance between two cards issued by the same company.
Making the Most of Your Interest Free Financing Offer
There are two ways that you can use an interest free financing offer. One way is to postpone paying off your debt. Some think that there's little reason to pay off your new purchases, or your existing balances, so long as you aren't incurring interest charges. Some even plan on transferring their new debts into another interest free promotional financing offer once their current one expires. Unfortunately this would be a mistake.
Instead, the best way to use these promotional financing offers is steadily pay down your debt, with the goal of eliminating it before interest begins to accrue. By using the end of the promotional financing period as an incentive for paying down your debt sooner, you can make the most of a credit card's promotional financing offers.
0% APR financing can be a great way to pay down your debt, or just another way to postpone doing so. By understanding how this type of financing works, and how to make the most of it, you can make the right decision the next time your are presented with one of these offers.
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.
This article was originally published on September 25, 2017, and has been updated.