Paying off your credit card balance in full every month is one of the best ways to avoid paying interest — not to mention a great way to stay out of debt. But what if you have a zero percent interest credit card?
While carrying a balance on a zero percent interest card is possible — and normal if you have a balance transfer credit card — it’s still to your advantage to get that balance paid off as quickly as possible.
Carrying a balance can affect your credit score
Even though you aren’t paying interest on your credit card balance, not paying off your balance in full could negatively affect your credit score.
Credit utilization — how much credit you are using versus how much has actually been extended to you — is a major component of your credit score.
The basic rule of thumb is to keep your debt-to-credit utilization ratio below 20 to 30 percent (the lower, the better). This means that if you carry a balance on your credit cards, that balance should equal no more than 20 to 30 percent of your available credit. If you get a new card, run up a bill well over that percentage and revolve a balance, your score is going to take a hit.
“The amount of the score damage is going to depend on just how high that ratio gets,” says John Ulzheimer, a nationally recognized credit expert who has previously worked with FICO, Equifax and Credit.com.
The best practice, as always, is to pay off your bills in full. If you do so, opening up the new credit card could ultimately wind up improving your score. Although, there might be an initial dip from the hard inquiry generated during the card application process.
This can also help you if you’re using a balance transfer credit card to pay off old debt. Keep the old credit card open after you transfer your balance to the new card, and your total credit card utilization will be reduced — as long as you don’t add any new balances to any of your cards.
Carrying a balance could saddle you with unexpected interest
If you decide to take an issuer up on a 0% interest promo, make sure to read the fine print. For instance, some financial institutions may stipulate that if you lose your grace period — the time frame between the end of a billing cycle and the payment due date — you could start to rack up interest on all new purchases.
In other words: let’s say you transfer a balance to a zero percent interest credit card. Then you use the card to make a new purchase. The card’s fine print might indicate that if you don’t pay off this new balance in full by the due date, you’ll lose your grace period and get charged interest on every subsequent purchase you make from the date of transaction onwards.
Avoid carrying a balance when your 0% interest rate expires
Even if there aren’t any early expiration caveats at play, you still want to avoid winding up with a high balance at the time the offer expires.
This is more likely to happen with a deferred-interest credit offer or a retail credit card than with one of the top 0% intro APR credit cards. Still, paying off your balance before the promotional rate expires is a smart move because it means you will have successfully borrowed money without having to pay interest.
Make more than the minimum payments
Remember, just because you have a zero percent interest rate credit card doesn’t mean you don’t have to make payments on your outstanding balance. Make at least the minimum payment on time, every time, or you could get stuck with late fees and penalties.
It’s smart to make more than your minimum payment whenever possible. Even if you can’t pay off your balance in full right away, paying off as much of the balance as you can afford will get you closer to clearing the balance before the promotional interest rate ends.
The zero percent interest offer gives you some flexibility at the beginning so you’re not playing catch up at the end.
As always, make sure you comparison shop to get the best possible rates and conditions your credit score will qualify for.