Zero APR Credit Cards
- What is a Zero-Interest-Rate Credit Card?
- What is APR?
- What is compounding?
- Low-Interest Rate Credit Cards
- Who Should Get a Low APR Credit Card?
- Pros and Cons of 0% APR Credit Cards
- 4 Steps to Maintaining a Low Credit Card APR
- No Interest Credit Cards for Bad Credit
What is a Zero-Interest-Rate Credit Card?
There is nothing better than getting something for nothing. Most of the time when you borrow money you have to pay it back with an interest charge. The cost using a credit card can be very expensive if you decide to finance a purchase. Some companies charge more than 18%. When it comes to the credit card, you can get rates as low as 0%, but there is usually a caveat which includes an increase in the rate after a specific zero-period term expires.
What is APR?
When you apply for a credit card, there are several factors that should drive your decision and one of the most important is the APR (annual percentage rate). This rate reflects the interest paid to the credit card lender, which is normally a bank, credit union or financial institution. This rate describes the rate that you will pay which includes compounding.
What is compounding?
Compounding is a term that describes the true rate that you will experience over the life of your outstanding balance. With a credit card, you are paying away interest because you have borrowed money to pay for goods or services. When you pay down your loan, you pay away both interest and principal, and your rate is the average rate based on a declining principal. This has a compounding effect which enhances the yield and is captured by the APR.
Here is an Example:
To determine how much interest, you’re paying on your credit card balance each day, you can convert your APR to a daily percentage rate. You would divide your interest by the number of days in a year which is 365. Daily, your bank will multiply your current balance by the daily rate to come up with the daily interest charge. That charge is then added to your balance the next day, a process called compounding.
If your credit card has an APR of 12%, it will have a daily rate of .032876%. If you balance is $5,000 at the 12% APR standard interest rate, the next day, interest is added and the balance becomes $5,001.43, plus any additional purchases and minus any new credits, from purchases of goods or services as well as debits from payments. This process occurs each day until the end of the cardholder’s monthly statement cycle. At the end of the month, the beginning $5,000 balance becomes $5049.3 when interest charges are applied at 12% APR.
Low-Interest Rate Credit Cards
Not only do many credit card issuers offer a zero rate, they also provide solid perks, such as no-late fees, or annual fees. Some have drawbacks like not providing cardholders point that they can use toward a rewards program. Generally, a credit card issuer is looking for a person that has a good credit history, as a customer that would consider a 0% credit card.
In many cases you can transfer your balance to a 0% card, that will last from 12 to 24-months. After the teaser period is over, your rate will increase to a standard rate that can range from 11% to 25% based on your credit score, and payment history. Most of the time, you will need to pay an upfront fee, but some issues give you a break on the fee if the credit is paid down in 60-days. Fees to transfer funds range from 2-4%.
One of the benefits of a balance transfer is that it can help you reduce your monthly payments and allow you to save money on existing debt.
Who Should Get a Low APR Credit Card?
To qualify for a low or 0% credit card you need to have good to excellent credit. This means a score generally above 690. If you are the kind of person that pays off their entire balance each month, then keeping a daily rate very low is less important since you will not be charged for holding a balance beyond the grace period. You might consider looking for a credit card that provides a lot of perks, such a reward program that is attractive. If you generally hold a credit card balance, then finding a low rate can be critical.
Low-interest rate credit cards are also good options for people who are looking to consolidate debt. Consolidating debt is the process of bringing all your debt together in one place. For example, if you have 3-credit cards each with $5,000, of balance you might consider consolidating all your debt into one $15,000 card. Debt consolidation requires a balance transfer, which can provide a move lower interest rate (even a zero-interest rate), for a specific period, and a lower rate over a long period of time.
Pros and Cons of 0% APR Credit Cards
The longer you are with a company that more likely they will be willing to cut you a good deal and keep your business. If your company cannot match a zero-interest loan, they might be able to provide you with other perks to keep your business. Even if you must switch eventually, qualifying for a zero interest will provide you with some leverage that will help you get a good deal.
Pros of a 0% interest credit card
- Zero interest for a teaser period which in some cases can last 21-months.
- You will pay no interest on purchases and in some cases on balance transfers.
- Most of the time, you will not be able to benefit from a zero interest on a cash loan.
This is great for expenses purchases. If you are thinking about buying a washing machine or using your credit card to pay for a vacation, zero interest is great as you will plenty of time to pay off your debt. Some credit cards will even allow you to space out repayments and not incur an interest charge.
If you have high-interest rate balances you will save lots of money by switching to a zero-interest credit card. This will give you time to pay back your loan, faster, without increasing your total debt with a change. A zero-interest credit card helps you accelerate your repayment.
Cons of a 0% interest credit card
Unfortunately, there are some drawbacks to a 0% credit card. All good things come to an end and the APR at zero does not last forever. Once the introductory period is over, your rate will climb back to the APR that is in line with your credit rating. If you could increase your credit rating during this period you will benefit, and if you happen to reduce it you will experience a substantial increase in your interest rate.
If you plan on making a balance transfer you should be aware that the 0% rate does not always include the transfer payment. Balance transfer payments tend to cost between 2-4% of the amount transferred. It’s important to perform your due diligence and read the terms and conditions prior to agreeing to a transaction. Additionally, you should do the math ahead of time, as a 3% transfer on $5,000 is $150 which they will take upfront.
Another caveat is that you could lose your 0% rate if you do not make timely payments. Read the disclosures to see if there are fees or penalties if you miss multiple payments and your balance is past due. You could get hit with a restrictive APR that can go higher than 25%.
4 Steps to Maintaining a Low Credit Card APR
The best way to maintain a good credit rating and therefore keep a low APR is to pay your bills on time. While there will always be unforeseen situations, it’s important to discuss any issues directly with your credit card issuers, to make sure that no blemishes show up on your credit report. Many credit card issuers have payment forgiveness, and will not charge you or report you to the credit rating agencies if you miss a payment. Some are less forgiving and it’s important for you to know this prior to experiencing any negative action from your credit card issuer.
You can also always try to negotiate your interest rate. Whether you are applying for a new credit card or have an existing credit relationship you should always try to negotiate the best deals. You should consistently look online for new deals that are available, and if you find an attractive deal, you can call your current provider and see if they will match that deal or provide you with something that is also attractive.
If you cannot make headway with your current credit card provider, you can always consider a balance transfer. The only drawback to a transfer is that most credit card issuers require and upfront payments of approximately 3%.
Lastly, you should try to avoid variable rates. Most credit card companies describe a fixed APR that they will charge you. This means that the interest rate that you are charged daily on purchases of goods and services remains constant. Some will provide you with a teaser rate, and they after a specific period will bump up the rate, but even those rates are fixed. A variable rate APR fluctuates with other interest rates. For example, your credit card provider might charge you 10% + the prime rate. The prime rate is a rate that is charged by banks and fluctuates with rates that are targeted by the Federal Reserve bank. If prime increases, your rate will increase. These rates are attractive when the borrowing rate from the Federal Reserve is low, but when interest rates start to climb, a variable rate can become a burden.
No Interest Credit Cards for Bad Credit
Zero interest rate credit cards are generally for people that have a credit rating above 690. It will be difficult to achieve without a good credit score. If you are interested in getting a zero-credit card rate you should work on increasing your credit score until you’re ready to apply again. However, applying for multiple cards in a short period of time can hurt your credit score, so wait at least six months before reapplying.
An alternative is you are eager to get a 0% interest card now, you can ask to become an authorized user on a member’s card. This allows you to use a card in that person’s name to buy things and pay it off with no interest.
Learn More about Low Rates &Fees Credit Cards
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Getting a zero-interest credit card requires a good credit rating above 690. A zero-credit card generally has a teaser period that can last up to 21-months. After the initial zero-rate period, the rate on your credit card will move back to a standard rate that is based on your credit rating. Generally, this rate is from 11% to 25%. You want to make sure during this period that you pay your credit card payments on time and keep your credit rating strong.
The rate that you will pay is called your APR (average percentage rate). This is the average of the daily rates that you will pay during a year. The rate is calculated daily, and your balance is charted each month if you do not pay off your entire balance. One way to avoid interest charges is to pay off your balance during the grace period which is the time from when you purchase a good or service on your credit card to the end of the statement period. A zero-interest rate is generally for a purchase of goods and services and no for cash advances. If I borrow money from your credit card at an ATM machine, you should find out in advance the cost of these funds.