They don’t really exist credit cards without interest, the main purpose of a credit card is, as its name indicates, to serve as credit instrument charging interest during the period that it lasts. However, some issuers offer 0% APR card promotions for a certain number of months.
A credit card with a 0% Annual Percentage Rate (APR) can help you save money by allowing you to skip interest charges during some promotional time, we speak in most cases of six months, a year up to 18 months.
In fact, the offer of a credit card without interest or 0% APR it will only last as long as you adhere to all the terms and conditions set forth by the card agreement.
Being late on a payment can cause the Promotional APR finish and that you Regular APR is activated.
A credit card with a 0% APR You will not be charged retroactive interest on purchases that you have not paid for, only on the balance that remains after the promotion period ends.
Let’s see more details of how does an interest free credit card work or card with 0% promotional APR.
The Consumer Financial Protection Bureau (CFPB or Consumen Financial Protection Bureau) offers us the explanation about the difference between the interest rate and the Annual Percentage Rate (APR).
- 1 What is the APR rate?
- 2 What is a 0% purchase APR?
- 3 Example of how an interest-free credit card works
- 4 How do I know if mine is an interest-free credit card?
- 5 0% APR vs deferred interest credit cards
- 6 How does the 0% annual interest rate work with balance transfers?
- 7 How to avoid paying interest on your credit card?
What is the APR rate?
APR on a credit card is the annual effective rate or annual percentage rate.
We can say that the APR rate is a more complex indicator to approximate the total annual equivalent cost of a credit card, beyond the simple nominal interest rate.
For the CFPB, the APR rate is an indicator that allows a more realistic comparison of the cost of borrowing money.
The APR It includes not only the nominal interest rate charged by the financial institution, it also includes other charges for the use and administration of the credit card. In countries like Mexico the APR receives the name of CAT (Annual Total Cost).
What is a 0% purchase APR?
When a credit card offers a 0% APR it means that you do not have to pay interest on purchases that are charged to you for a set period of time, usually between 12 and 21 months.
Once the 0% APR promotional period, will apply to your balance or account balance the regular APR.
Unless otherwise stated in the terms and conditions, you will continue to be charged ordinary interest on other types of transactions, such as balance transfers and cash advances.
It is also possible to get a 0% interest on balance transfers, although this requires a special type of credit card.
Example of how an interest-free credit card works
In the table below we can see an example of how does an interest free credit card work or card with 0% APR promotional:
|Interest rates and interest charged|
|Annual Percentage Rate for Purchases (Purchase APR)||0% promotional APR during the first 15 billing cycles, once completed, it will apply from 15.99% to 24.74% variable according to your creditworthiness and the average market interest rate.|
|Balance Transfer Annual Percentage Rate (Transfer APR)||0% promotional APR for the first 15 billing cycles after opening your account.
Then apply a 15.99% to 24.74% according to your solvency.
APR that can vary depending on the average interest rate in the market.
|Annual Percentage Rate for advances by ATM (Cash Advance APR)||25.99%. APR that can vary depending on the average interest rate in the market.|
The first part of the chart above details the card’s interest rates and interest charges. The APR rate it is broken down by the type of transaction: a purchase, a balance transfer, or a cash advance.
The Debt Counseling College offers us examples in calculating the APR rate.
The offer of 0% APR may be canceled if you violate any of the terms and conditions of your credit card agreement. This can happen if, for example, you do not make a minimum payment before the due date.
Once the “zero percent” period runs out, you’ll be responsible for any interest charges that accrue. After the third month and thereafter, regular or ordinary ARP interest will begin to accrue on any balance or unpaid balance.
How do I know if mine is an interest-free credit card?
0% APR vs deferred interest credit cards
Although similar, credit cards with 0% APR Y deferred interest credit cards they have different financial consequences.
If a deferred-interest credit card balance is not paid when the interest-free period runs out, finance charges will be applied retroactively. Deferred interest offers can be found most commonly with department store credit cards.
If you sign up for a credit card what promises not charge interest for some time, be sure to find out if it’s a 0% APR card or a deferred interest promotion.
The CFPB has recently published an advisory asking retailers to make this distinction more transparent.
A CFPB study found that many consumers who do not pay their balance on this type of store cards they have the means to do so.
The study showed that people paid the rest of the balance soon after the promotion period, once the deferred interest charges took effect. According to the CFPB, finance charges take consumers by surprise.
How does the 0% annual interest rate work with balance transfers?
These are commonly known as balance transfer credit cards. The same rules that govern credit cards with a 0% APR for purchases apply to balance transfer cards.
If, for any reason, you do not make a minimum payment or violate its terms and conditions, the 0% APR promotion will end.
Although the balance transfer cards do not charge interest, most impose an initiation fee.
When transfer your balance, you will be charged between 3 to 5 percent of the total amount that is transferred.
In most cases, this fee will be less when compared to the savings you get from deferring your interest under a promotion. 0% APR.
Visualizing your savings with the balance transfer
Another added benefit of a balance transfer credit card is the fact that it will speed up the speed of debt repayment.
You can use web tools like online financial calculators to see how much you can save using a balance transfer credit card 0% to pay off your debt.
For example, if you transfer $5,000 at interest ordinary APR 15% towards a 0% APR promotion, with a term of 5 years and 6 months; you can save approximately $1,394 in interest when transferring your balance. It will take 5 years, 2 months to pay off your debt at this rate.
How to avoid paying interest on your credit card?
You’ll never have to pay interest on a credit card as long as you pay off your balance by the end of your grace period.
By law, you are entitled to a minimum of 21 days from the time you receive your bill to pay the balance, before incurring finance charges.
This term without interest is called “Grace period”. Some Credit cards will extend the Grace period to 25 days.
You can find out the grace period of a credit card by examining the Schumer Box, of the product that generates expectations. Pay special attention to the interest rates and fees section near the top of the cost summary chart.