A 0 percent APR credit card can be a great financial tool, but there are debt traps to be aware of when using one. Always make the minimum payments on your credit card to avoid consequences like late fees, damaged credit and penalty APRs.
CONS: Not paying off the balance could result in enormous finance charges. These offers are basically deferring the interest for you within a set period of time.
Pay off debt faster
If you have existing debt on credit cards with high interest rates, you can consolidate your debt by doing a balance transfer to a 0% APR credit card. With a 0% APR card, all of your payment goes toward the principal, allowing you to repay your debt faster.
Key Takeaways
Zero-interest loans, where only the principal balance must be repaid, often lure buyers into impulsively buying cars, appliances, and other luxury goods. These loans saddle borrowers with rigid monthly payment schedules and lock them into hard deadlines by which the entire balance must be repaid.
A credit card with an introductory 0 percent APR can help you manage new debt or pay off old balances. However, a 0 percent intro APR card can hurt your credit if it causes you to carry a higher balance than usual or if you carry your balance beyond the introductory offer period.
The zero lower bound problem refers to a situation in which the short-term nominal interest rate is zero, or just above zero, causing a liquidity trap and limiting the capacity that the central bank has to stimulate economic growth.
When your intro APR ends, your credit card's regular APR will kick in on any remaining and new balances. Knowing when your promotional period ends helps you pay off your balance beforehand and keeps you from being surprised by mounting interest on a residual balance.
A 0% APR on a credit card means that you won't be charged interest on purchases, balance transfers or both, for a fixed period of time. Once the card's promotional period ends, you'll be charged interest on any remaining balance.
Create a repayment plan: You should have a plan in place that states how much you need to pay each month in order to have a zero balance at the end of the intro period. Pay off your balance in full: Your goal should be to have no balance once the intro 0% APR period ends.
0% APR auto loans are reserved for "well-qualified" buyers.
In most cases, "well-qualified" refers to borrowers with a credit score of 740 or higher. If a borrower isn't in this credit bracket and applies for the 0% APR offer, they could be taking a hit on their credit score that could have been avoided.
It's a marketing tool
Credit card companies know that interest rates are important to consumers, especially those who often carry a balance. They run 0% introductory offers as a way to entice customers to sign up.
You'd save money on interest
If you paid $200 per month on such a card, you could become debt-free in 20 months with $0 in interest paid.
There are many reasons that automakers and dealerships advertise 0 percent APR rates to customers. The main reason is that they want to sell cars, and this attractive offer often gets people in the door. Unfortunately, once you get in the door: You may realize that you don't qualify for 0 percent APR.
0% offers are for a set period of time
Your 0% interest rate is usually an introductory/promotional offer given to you for a limited time. Afterwards, any remaining introductory/promotional rate balance, will be charged at the card's standard rate.
If you have a low-interest loan or 0% financing, there is little to no benefit to an early payoff. The same is true if you're close to the end of the loan. If you don't have an emergency fund, use your extra cash to start one before you pay off your car loan.
When Is 0% Financing A Bad Idea? Choosing to take out a 0% financing loan may not be a good idea if: You have a lower credit score or shorter debt repayment history. You can't support regular car payments for four or more years.
Since the dealership only profits from the actual sale, they will rarely agree to bargain down the price and often waive other incentives, like cashback rebates. Stripping away rebates helps them make their money back. Because of this, a no-interest loan could cost more than the savings you'd get negotiating on price.
In addition to depreciation, monthly payments can lead to a strain on personal finances. Car ownership comes with ongoing expenses such as maintenance, gas, insurance, and taxes. These expenses can add up, making the total cost of ownership much higher than the monthly payment alone suggests.
Costs of an interest-free deal
If you still have money owing after the interest-free period ends, you'll be charged interest. Interest rates can be as high as 26%. Retailers also charge fees on interest-free deals, which may be added to the amount borrowed.
A 0% APR credit card can work better for you if you plan on making a large purchase and don't anticipate paying the balance anytime soon. However, if you plan on paying the balance in full after each billing cycle and want to minimize costs, then a no annual fee card would be recommended.
It's generally recommended that you have two to three credit card accounts at a time, in addition to other types of credit. Remember that your total available credit and your debt to credit ratio can impact your credit scores. If you have more than three credit cards, it may be hard to keep track of monthly payments.
Zero interest car loans usually come with a higher price tag, expensive extras and strict repayment terms. If you miss even one payment, you lose your 0% interest rate and get charged late fees.
People tend to get 0% interest credit cards so they can make expensive purchases upfront – such as holidays, festival tickets or concert tickets – and pay off how much they owe over a set period of time, spreading the cost of their initial payment.
As far as the IRS is concerned, there is no such thing as an interest-free loan. Loans without interest, or at below-market interest rates, are recharacterized so that the lender must recognize market-rate interest income.