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Credit cards have a mixed reputation, depending on who you talk to. On the one hand, for young people starting out with building a credit score and profile, credit cards can be a useful tool. Responsible usage complete with regular timely payments each month is a clear way to build a favorable track record that can lead to a healthy credit score and profile. Simple.
For others, irresponsible credit card usage can lead to living beyond one’s means and onerous balances of high-interest rate debt that becomes costly when not promptly paid off. Not to mention that any late payments or defaults that result from accumulating high debt balances will damage a credit score and profile.
Somewhere in between lay the territory of promotional 0% APR credit cards, which if used responsibly, can serve several positive purposes without any real downside. But, like any other credit card, 0% APR cards must be managed properly in order to prevent future financial difficulty. So, is a 0% APR credit card a good idea for you? Let’s take a closer look.
0% Promotional APR Credit Cards
0% APR Credit Card offers are often sent through the mail to those individuals who are generally in good standing with their overall credit profile, and these offers can be found online, as well.
In either case, 0% APR is typically made available on a credit card for a promotional period of twelve to twenty-one months, during which all purchases made with the card will not carry any interest expense. Some 0% APR offers will also extend to balance transfers, though these will incur a fee, typically 2%-5% of the amount being transferred.
However, once the promotional period is over, any remaining unpaid balance will incur interest expense at the prevailing rate on the card – typically an APR of 15.99% or higher. To determine the specifics of a 0% APR card that you are considering, consult the Schumer Box, which is a table found within the credit card agreement that displays a summary of the various APRs as they relate to purchases, balance transfers and cash advances.
Have a look at the terms and conditions associated with the card, and recognize that the 0% APR promotional period can end early if you violate any of the terms and conditions of the offer – including making any late payments.
Is a 0% APR Credit Card Right For Me?
On the face of it, applying for a 0% APR can seem like an obvious move – who wouldn’t want a credit card that doesn’t charge interest expense? Well, for starters, those individuals who have a hard time using credit responsibly should consider the drawbacks of 0% APR.
As enticing as the promotional period can be, it is vitally important to remember that the free-ride of 0% APR will inevitably end. If you’re the type of person who will have difficulty paying off the entire balance before that day approaches, then 0% APR may not be for you. Recognize that 0% APR does encourage spending – and sometimes the extra spending put on the card isn’t for emergencies – but for extra experiences, goods and services – essentially “wants” – that are not truly necessary and can result in living beyond one’s means.
This is where it is important to be brutally honest with yourself – does the potential exist for you to misuse 0% APR? Because if it does, the unpaid debt balance that you accumulate will eventually be charged an APR of 15.99% or higher. Do you want to live with the eventual stress that comes with high-interest rate revolving debt? Probably not. On the other hand, if you are the type of individual who will pay back all of your balance before the promotional period ends, then a 0% APR credit card can make tremendous sense.
The additional interest-free credit line, combined with your responsible repayment habits, will benefit both your purchasing power and credit profile.
When 0% APR Makes Sense
If you fall into the camp of responsible credit card users, 0% APR (or low-interest rate APR) promotional balance transfers make great sense. Simply put, they can save you a lot of money in interest expense – even after factoring in any fees for the balance transfer itself.
The math is pretty obvious – if you can move $10,000 from a high-interest rate card (let’s say 14.99%) to a card that charges 0% interest for a year or more, the approximate $1,500 in interest expense savings may get reduced by a 2%-5% balance transfer fee charge – but still results in a savings of $1,000 or more.
Then, if you’re lucky, you may even find a subsequent 0% APR credit card to transfer the balance to when the first card’s promotional period ends. This can also be the case if a purchasing balance remains on your 0% APR card after the promotional period ends – though this should never be your primary objective.
Consider it a lucky break if you fail to pay off any remaining balance and find a subsequent 0% APR balance transfer card that you can then transfer your unpaid balance to, effectively utilizing a second 0% APR credit card as a “bailout.”
Another scenario when 0% APR makes good sense is in the event of making a large purchase – be it expected or unexpected. A 0% APR credit card immediately becomes a useful tool in a scenario when emergency home or auto repairs arise, for example.
Even in the case of defraying cash flow outlay for a larger planned expense – such as a vacation – a 0% APR card can make things easier while serving the same purpose as a personal loan – without the interest rate. Having a 0% APR credit card can work out very well – but only with careful and proper planning.
Make certain to budget each month for the proper repayment amount so as to have the entire card balance paid in full prior to the end of the promotional rate period. Do this, and you will be using 0% APR responsibly, enjoying the benefits of inexpensive credit and balance transfers while simultaneously building your credit score and profile through consistent timely monthly repayment of your balance.
About The Author: Steven Brachman
Steven Brachman is the lead content provider for UnitedSettlement.com. A graduate of the University of Michigan with a B.A. in Economics, Steven spent several years as a registered representative in the securities industry before moving on to equity research and trading. He is also an experienced test-prep professional and admissions consultant to aspiring graduate business school students. In his spare time, Steven enjoys writing, reading, travel, music and fantasy sports.