What does 0 percent APR mean?

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One of the most popular introductory offers credit card companies and retailers advertise is 0 percent APR. But what does 0 percent APR mean? Does 0 percent APR mean no interest? What is an interest-free period?

These are probably just some of the questions you’re asking when trying to figure out if this perk is really all it’s cracked up to be.

What is a 0 percent intro APR?

Before you can understand what a 0 percent APR is, you need to understand what APR is. APR is an initialism for annual percentage rate. It’s a metric that shows you the true cost of borrowing money. APR takes the interest cost and combines it with the cost of any additional fees to give you a complete and accurate cost of borrowing. It’s expressed as a percentage of the total size of your loan or outstanding debt.

In simpler terms, it’s a complete look at how much it’s going to cost you to borrow money for an entire year.

Zero percent APR means that the money you are borrowing is available for no additional cost. You still have to pay back the money you borrowed, but there is no additional interest requirement or additional fees.

How does a 0 percent intro APR work?

Generally, a 0 percent APR is a promotion that lets you borrow money for a fixed period at no cost. During this time, you’ll still need to make payments, but you won’t be accruing any additional costs if you only make the minimum payments.

The two most common instances where you’ll see a 0 percent APR promotion are on new purchases and credit card balance transfers.

0 percent intro APR on balance transfers

A balance transfer is when a credit card company allows you to use its card to pay off a credit card balance with another company. When you’re able to get a 0 percent intro APR offer, this can help you save significantly if you are accruing interest on an outstanding balance on the other card. The offer effectively pauses the interest from accruing for the introductory period, which can help you save and catch up on your debt obligation.

0 percent intro APR on new purchases

Sometimes you may be able to get a 0 percent APR offer on a new purchase as an incentive to buy. For example, a car dealership might offer 0 percent APR for the first 15 months on a new car purchase. What this means is that during the first year and three months of your loan, you will only have to make payments on your principal balance (the actual amount you borrowed). No additional interest charges or fees will accrue.

Some credit cards offer similar 0 percent intro APRs on new purchases, with added flexibility to spend where you need.

0 percent intro APR vs. deferred interest

A very important distinction to be aware of is the difference between a 0 percent APR and a deferred interest offer. With 0 percent APR, there are no interest charges for the introductory period — ever. There is no secret clock running in the background adding up charges.

Deferred interest, on the other hand, is only pushing off the interest payments to the end of the introductory period. If you pay off the entire balance by the end of the period, you won’t owe any of the interest costs.

However, if you owe even a penny on the balance after the introductory period, you’ll now owe 100 percent of the interest costs that have accrued during the deferred interest period. Additionally, interest continues to accrue while you pay this all off.

What happens when a 0 percent intro APR ends?

When your interest-free period ends, your account converts to the terms outlined in your card agreement. You won’t owe any “back-interest” on the part of your loan that you’ve paid off or the part that is still outstanding. Beginning from that day forward, though, you’ll begin accruing interest charges on the outstanding balance in line with your agreement.

It’s important when picking out a credit card or financing a purchase that you look at the rates and fees after the 0 percent APR period. This becomes especially important if you don’t have plans to completely pay off the lent amount or the cost of the item before the end of the period.

What to look for in a 0 percent intro APR offer

  • Credit score/qualification requirements: Zero percent APR offers aren’t always extended to every borrower. Generally, you’ll see high credit score requirements to qualify.
  • Length of intro period: While 0 percent APR means no interest, it doesn’t mean the offer lasts forever. Usually, you’ll see 0 percent APR periods for six-, 12-, 15- or 18-month periods.
  • Go-to rate/ongoing APR: After the introductory period ends, your loan converts to a new rate that you’ll have for the remainder of your payments. You must look at what this rate is, especially if you plan to still be paying. Even if you’re planning on paying things off during the 0 percent APR period, life can happen, and it’s a good idea to be as prepared as possible.
  • Fees: There may be fees outside of the funding process that don’t have to be included in an APR calculation, like a balance transfer fee. Make sure you know exactly what you have to pay.

Pros and cons of a 0 percent intro APR

Pros

  • Can save money on interest charges
  • Provides opportunities to catch up on debt with balance transfers
  • Gives the ability to buy things now and pay later without additional costs

Cons

  • May foster bad spending habits when used incorrectly
  • Rates after the introductory period could be higher
  • Offers may require minimum credit scores or other qualification criteria

How to make the most of a 0 percent APR period

  • Don’t use the available credit with a balance transfer. When you transfer the balance of your credit card to a 0 percent APR offer, your initial credit card gets paid off. This can make it tempting to start putting charges back on that card, but that might keep you in debt longer.
  • Have a plan to take full advantage. Yes, a 0 percent introductory period can bring relief and lower the amount you have to pay. However, it doesn’t mean you should just kick back, relax and enjoy the benefits. Use the time to get ahead on payments and maximize your savings. Otherwise, you’re just pushing off the money you owe and not saving much at all.
  • Don’t use it as an excuse to buy more. Just because your payments are lower right now doesn’t mean they’re always going to be. Once the introductory period ends, the payments go back to the normal rate, which could be quite high. Don’t use the 0 percent APR period as an invitation to buy more things you really can’t afford.

Bottom line

Knowing what an introductory APR is can open up a wide range of opportunities to take advantage of free borrowing or to catch up on credit card debt.

But make sure you understand that this added benefit is not a free pass to spend frivolously or buy things that you can’t afford. When used properly, 0 percent APR offers can provide convenience, relief and an avenue to get ahead on your finances.