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.
Comments Section No, there's nothing wrong with taking advantage of 0% APR, with some caveats. It's free money if used correctly. With that said, it won't meaningfully affect your credit as long as you're paying the minimum due with each statement.
You must be careful to avoid getting wrapped up in the thrill of 0% deals. Although the interest costs are listed as zero, the true numbers are built into the price of the loan. Unless you're aware of this before signing on the dotted line, you may be signing into a less than stellar deal.
A 0% APR Credit card still has a credit limit and a 0% APR credit card still reports to the credit bureau like any other credit card, so when you are at 100% of your credit limit, your credit score will drop tremendously. Even at 50% you will have a 80-100 point drop.
Your 0% APR deal could be canceled
Even with a 0% APR card, you'll still have to make monthly minimum payments — usually a small percentage of your balance. And if your payment is late, even by a single day, your card issuer could cancel the 0% offer and reset your card's interest rate to the ongoing APR.
It can reflect badly on your score if you consistently (more than three months) have a utilization rate of zero percent because you've opened cards and aren't using them at all. That indicates to credit reporting agencies that you're not using your credit limits at all rather than using them responsibly.
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.
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.
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.
Many manufacturers and dealerships advertise no-interest car loans. These loans are offered through captive finance companies, which the manufacturer owns, and are used to attract prospective buyers. As car loan interest rates soared over the past few years, no-interest car loans became a better and better deal.
Called the five Cs of credit, they include capacity, capital, conditions, character, and collateral. There is no regulatory standard that requires the use of the five Cs of credit, but the majority of lenders review most of this information prior to allowing a borrower to take on debt.
Use the debt snowball method
In order to use this method, list all of your credit card debts from lowest balance to highest balance. Now start concentrating on wiping out the credit card with the lowest balance while still making the minimum payments on the other cards. The point of this strategy is to build momentum.
A 0% APR credit card offers no interest for a period of time, typically six to 21 months. During the introductory no interest period, you won't incur interest on new purchases, balance transfers or both (it all depends on the card).
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.
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.
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.
Credit cards with 0% interest on purchases can be a good way to spread cost and build up your credit score. For example, you could use one to book flights, pay for a holiday or cover the cost of home improvements and then pay it back in monthly repayments.
You may be able to secure a 0% APR offer by requesting one from your credit card issuer. Offers are generally for balance transfers, but some issuers also offer pay-over-time plans or credit line loans. Using your card responsibly and negotiating a retention offer can increase your chances of getting a 0% offer.
What is wrong with a zero interest rate? Doesn't it boost investment, growth, and employment? There are numerous things wrong with a zero interest rate such as less return on past savings, poor investments, negative returns, and uneconomic growth.
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.
That means that if you have a car note for several years, you're paying monthly costs plus interest for a vehicle that's going down in value. This leads to a situation where you can be underwater on your car, meaning you owe more than your car's even worth.
Making on-time payments to creditors, keeping your credit utilization low, having a long credit history, maintaining a good mix of credit types, and occasionally applying for new credit lines are the factors that can get you into the 800 credit score club.
Lenders consider your credit utilization when making lending decisions because it represents how well you're managing your existing debts. In general, lenders look for a credit utilization ratio of 30% or less. Having a ratio higher than this can signal you're using too much of your available credit.
So which scenario is worse — not having any credit or having bad credit? “Neither is good,” says Greg Reeder, CFP, a financial advisor with McClarren Financial Advisors in State College, Pennsylvania. However, “A poor credit score is worse,” he says. “If you have no credit, you can start from the ground up.