How do 0% APR credit cards work? 8 things to know before applying

Chances are you’ve received a credit card offer in the mail boasting a 0% APR and considered applying.

The thought of no interest for a period of time is enticing, particularly if you want to finance large purchases or debt payoff. But the terms vary by credit card and you may not be aware of all the rules that apply to 0% APR offers.

Before you jump on an offer and submit an application, it’s important to know just how a 0% APR credit card works so you can use it to your advantage.

Below, CNBC Select reviews the ins and outs of 0% APR credit cards and how to use them wisely to avoid interest on new purchases and debt.

How do 0% APR credit cards work?

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).

These cards can help you consolidate credit card debt by transferring balances to a balance transfer credit card or pay for new purchases over time without incurring interest.

There are some quirks about 0% APR cards that you should understand before choosing a card, which we explain below.

1. The 0% APR period doesn’t apply to all transactions

While you may be excited about a 0% APR offer, you should be aware that the promotional financing doesn’t always apply to all transactions you make with your card. Usually, the transactions that qualify for no-interest financing include new purchases and balance transfers. Other actions, such as cash advances, are excluded.

2. The length of the interest-free period varies by type of transaction

The 0% APR may be the same for balance transfers and purchases, such as the Chase Freedom Unlimited® Card with 0% for the first 15 months on purchases and balance transfers (after 14.99% to 23.74% variable APR).

But in some cases, the intro period may be greater for one transaction versus the other. The Discover it® Balance Transfer offers 0% APR for the first 18 months on balance transfers and 0% APR for the first six months on purchases (after 13.49% to 24.49% variable APR).

And some cards only offer a 0% APR on balance transfers or purchases. For example, the Citi® Double Cash Card offers 0% for the first 18 months on balance transfers (then 13.99% to 23.99%, variable APR), but no special financing for purchases. New purchases will immediately incur a 13.99% to 23.99% variable APR.

3. There are limits to how much of your balance qualifies for no interest

When you are approved for your new credit card, you’ll be assigned a credit limit based on your application. A credit limit is the maximum amount of money that can be charged to your card. If you have a 0% APR on new purchases, you can only spend up to your available credit limit.

Credit limits become particularly important if you plan on completing a balance transfer. Often, credit card issuers set limits on what portion of your credit limit may be utilized by transferring a balance from an existing account. 

The terms for the Chase Slate® credit card state: “The total amount of your request(s) including fees and interest charges cannot exceed your available credit or $15,000, whichever is lower.” 

That means if you receive a $30,000 credit limit for your new Chase Slate card, you will only be able to transfer up to $15,000 of existing debt to your new account. If your plan was to transfer $20,000 from another balance, you would have to reconsider.

4. There may be a fee for balance transfers

Most balance transfer credit cards charge a balance transfer fee, which is usually 3% per transfer. So if you transfer $5,000, you’ll incur a $150 fee. This fee can be outweighed if the amount you save on interest during the special financing period is more than the 3% fee (and it often is). But you can also consider no-fee balance transfer credit cards, such as the Amex EveryDay® Credit Card (see rates and fees).

5. You might not qualify for a 0% APR card

If you’re looking to open a 0% APR card, check your credit score first. Introductory no-interest credit cards typically require good credit (scores 670 to 739) or excellent credit (scores 740 and greater).

If your score falls in the fair and average credit range (580 to 669) or bad credit range (below 669), you may have trouble qualifying for a 0% APR card. Some cards for people with less than stellar credit may still offer 0% APRs, but the intro period will typically be shorter than cards for good or excellent credit.

If you fall into this category, consider alternative debt-payoff options, such as personal loans, that may have more lenient credit requirements and generally lower interest.

6. Your offer may be canceled

If you fail to make at least the minimum payment on time, you may risk your 0% APR being canceled.

For instance, the terms for the Blue Cash Preferred® Card from American Express state: “Loss of introductory APR: We may end your introductory APR and apply the penalty APR if you do not pay at least the minimum payment due within 60 days after its payment due date.” (See rates and fees.)

7. Any remaining balances will incur interest

If you carry a balance after the intro period ends, it will incur interest at the regular APR. This can counteract any savings you may have received during the interest-free period. As a result, it’s key to pay off your balance in full prior to the 0% APR ending. 

8. Some cards charge retroactive interest

While you may see a 0% APR card as a way to finance purchases or debt, there may be increased penalties for carrying a balance after the intro period ends. Some cards (mainly store cards) charge deferred interest (or retroactive interest), which kicks in when you continue to carry a balance after the 0% APR period ends.

With deferred interest, you’ll incur a charge for all the interest you accrued since the date you made your purchase. The surefire way to avoid deferred interest is to have a repayment plan in place that ensures you have no balance left when the intro period ends.

How to get the most benefit with a 0% APR card

In order to get the most benefit from a 0% APR card, familiarize yourself with the terms of the offer and set up a plan to pay off your debt. Check out these three tips to get the most benefit out of a 0% APR period:

  1. Read the fine print: Make sure you review the terms and conditions of your credit card. That includes the fine print associated with the 0% APR offer, such as the expiration date, timeline for completing a balance transfer, any balance transfer fees and the interest rate once the intro period ends.
  2. Create a repayment plan: You should have a plan in place that states how much you need to pay each month in order to have a zero balance at the end of the intro period.
  3. Pay off your balance in full: Your goal should be to have no balance once the intro 0% APR period ends. If you don’t, any lingering balances will be hit with the regular purchase APR and you may be hit with a bill for all the interest you accrued since the date you made your purchase if your card charges deferred interest.