What Does 0% APR Mean?

Have you ever seen an ad or received an offer in the mail that says “0% APR” and wondered what it means? If so, you’re not alone. Let’s start by diving into APR, Annual Percentage Rate, which is the annual cost of borrowing money when you use a credit card or take out a loan. A 0% APR means you won’t pay any interest on the money you borrow for a specific period, as determined by the lender. For credit cards, this could mean no interest on purchases, balance transfers or both during the 0% APR period. For loans, it means you won’t be charged interest on the loan amount during the promotional period.

Taking advantage of a 0% APR offer can be an opportunity to save money or find wiggle room when your budget is tight, but it’s important to understand how these offers work and how to use them wisely.

How does 0% APR work?

Many lenders, including credit card companies and banks, offer 0% APR as a promotional or introductory offer for both new and existing customers. This means you won’t pay any interest on the money you borrow during the promotional period. Depending on the type of financing, this type of promotion can work in a few different ways.

• For credit cards: A 0% APR offer may apply to new purchases, balance transfers or sometimes even cash advances, but only for a limited time — typically between 12 and 21 months. During this period, you won’t be charged interest on qualifying transactions. However, once the promotional period ends, any remaining balance will start to accrue interest at the card’s regular non-promotional APR, which can be much higher.

• For loans: A 0% APR loan means you won’t pay interest on the borrowed amount for a set period. This is common with certain personal loans, auto loans or store financing offers. Once the 0% APR period ends, any remaining balance will start to accrue interest at the loan’s APR agreed to after the promotional rate ends.¹

The 0% APR can be beneficial if you need to make a big purchase like an engagement ring, car repair or if you're trying to pay off existing credit card debt with another card issuer. However, once the introductory period ends, the loan or credit card’s non-promotional APR will resume, which could be high. That's why it's important to pay off your balance before the 0% APR period expires.

Types of 0% APR offers

A 0% APR offer on a credit card is typically available for new purchases and balance transfers, but it can also apply to cash advances in some cases.

Credit card purchases

A promotional or introductory offer with 0% APR on new purchases means you won't pay interest on what you buy during the set period. This can make it easier to manage large expenses by spreading out payments without extra charges.

For example, if you purchase a $1,000 laptop with a 12-month 0% APR offer, you’ll need to pay $83.33 per month ($1,000 ÷ 12 months) to fully pay off the balance by the end of the promotional period, assuming no other charges are made to your account.

Balance transfers

A balance transfer involves transferring debt from a high-interest credit card to one that offers a lower interest rate.² A 0% intro APR on balance transfers allows you to move existing debt from a high-interest credit card to a new card with 0% APR for a set period. This can save you a lot of money in interest payments and help you pay down your debt faster. However, there is usually a balance transfer fee, typically 3% to 5% of the amount transferred.³ Even with the fee, you may save money if you pay off the transferred balance within the 0% APR period.

If you’re researching credit card balance transfer offers, you may have encountered the option of a debt consolidation loan. Here are important things to keep in mind when choosing between the two.

Even if the APR of a debt consolidation loan is higher than the APR of a credit card balance transfer offer, that low or 0% introductory APR credit card will often default to a higher variable rate once the introductory period expires. This means that you could end up paying a higher rate on any remaining balance after the intro period is over. With a OneMain debt consolidation loan, you get the certainty of a fixed rate and predictable monthly payments with a set payoff date.

As always, each type of loan or credit card balance transfer offer has its own eligibility requirements, associated risks and costs. That’s why it’s important to consider your needs and financial situation before deciding which option is best for you.

Qualifying for a 0% APR intro offer

Not everyone can get a credit card that offers a 0% APR promotional offer. These offers are usually reserved for people with good to excellent credit scores. Your credit score is a three-digit number that basically represents your creditworthiness based on your credit history.⁴ Most lenders look at your credit score to determine if you’re likely to repay the borrowed money.⁵

If your credit score is strong, you may have access to 0% APR offers on credit cards for purchases or balance transfers. But even if a 0% APR offer isn’t available to you, you may still have options.

Will you always have 0% APR?

Unfortunately, the 0% APR period usually doesn’t last forever and varies depending on each lender's individual terms. Once the introductory or promotional period ends, the non-promotional APR will apply to any remaining balance. Make sure you understand when the 0% APR period ends and what the regular APR will be.

If you still have a balance when the 0% APR period ends, you may end up paying a lot in interest, which could defeat the purpose of getting the 0% APR offer in the first place.

How to use 0% APR to the fullest

To make the most of a 0% APR offer, you need to be strategic about spending and repaying. Here are a couple of moves you can make to help maximize the benefits:

Pay off your balance before 0% APR ends

To get the most out of a 0% APR offer, it’s important to understand how it works for both credit cards and loans:

• For credit cards: If you don’t pay off your full balance before the 0% APR period ends, any remaining balance will begin to accrue interest at the card’s regular APR. This can cause your debt to grow quickly, making it harder to pay off.

• For loans: Some 0% APR loans may use a deferred interest model, where interest is calculated from the start but only charged if you don’t pay off the balance before the promotional period ends. This means if you don’t repay the full loan amount in time, you could be charged all the interest that would have accrued during the promotional period.

You can avoid extra interest charges by having a clear plan to pay off your balance before the 0% APR period ends. This applies to both credit cards and loans. If you don’t pay off the full balance before the promotional period expires, the remaining amount will start collecting interest at the non-promotional rate, which can significantly increase your costs.

Here are a few steps to help you pay off your balance before interest resumes:

• Create a budget and payment plan
• Aim to pay more than the minimum monthly payment required by your lender or credit card issuer before the promo rate expires so you don’t get hit with interest charges
• Automate your monthly payments to avoid paying late and potentially owing more money in late fees
• Set a reminder for when your promotional or introductory period ends

Don't add new debt to your balance transfer

While you're focusing on paying off your balance, it's important to avoid adding new debt. This means not using your 0% APR credit card for new purchases unless you really need to. Adding new debt may make it harder to pay off your balance before the 0% APR period ends. If you must use your credit card, try to pay off the new charges immediately to avoid increasing your overall balance.

Here are a few things you can do to make the most of your balance transfer card:

• Keep your 0% APR card solely for paying off the balance transfer
• Choose a low-interest card or a rewards card for new purchases
• Set aside funds each month specifically for new purchases

Try not to overspend during the promotional period

It may be tempting to use a 0% APR offer to make lots of purchases, especially since you won't be paying interest for a while. However, overspending can lead to a large balance that is hard to pay off before the 0% APR promotional or introductory period ends.

Check out these hacks to help avoid overspending:

• Set spending limits
• Try prioritizing needs over wants
• Avoid temptation and impulse spending

Make your 0% APR offer work for you

Taking advantage of a 0% APR offer starts with a solid plan for repayment. Before you sign up for a 0% APR credit card or loan, know how long the introductory period lasts and what the regular APR will be afterward. By calculating how much you need to pay each month, you can successfully clear your balance before the 0% APR period ends.

Remember, a 0% APR offer is a tool to help you save money on interest and pay off debt faster. If used correctly, it can be a great benefit to your financial situation. But without a plan, you could end up with more debt and higher interest payments. So be smart, stay disciplined and use the 0% APR offer to your advantage.

Sources:

1 "What does 0% APR mean?" https://www.bankrate.com/credit-cards/zero-interest/zero-percent-intro-apr-guide/
2 "What Is a Balance Transfer, and Should I Do One?" https://www.nerdwallet.com/article/credit-cards/what-is-a-balance-transfer
3 "What Is A 0% APR Credit Card?" https://www.forbes.com/advisor/credit-cards/what-is-a-0-apr-credit-card/#:~:text=is%20not%20guaranteed.-,What%20Does%200%25%20APR%20Mean%3F,no%20interest%20is%20being%20charged.
4 "What Is a Credit Score?" https://www.equifax.com/personal/education/credit/score/articles/-/learn/what-is-a-credit-score/
5 "How do 0% APR credit cards work? 8 things to know before applying" https://www.cnbc.com/select/how-do-0-apr-credit-cards-work/#:~:text=You%20might%20not%20qualify%20for,(scores%20740%20and%20greater).