What Does 0% APR Mean and How Does It Work?

You see 0% APR offers all the time — the opportunity to pay no interest when you finance furniture, appliances, home improvement supplies and, quite often, any purchase you make on a new credit card.

Perhaps you’re curious: How do 0% APR offers work? How can banks offer them? Is interest-free financing too good to be true? A scam?

Here, we’ll explain why 0% APR offers exist, how they work, and how you can use them to make it easier to afford a large purchase or simply to put more money in your pocket.

What Does 0% APR Mean?

There’s one simple way to think of a 0% APR credit card – a free way to borrow money for a limited period of time.

Remember – credit card companies are running a business. Ordinarily, when you borrow their money to pay for purchases over time, they are going to charge you interest.

A lot of interest, in fact. The amount of interest you pay is expressed as the APR, which stands for annual percentage rate.

Let’s say your APR is 25%.

Now, if you charge an item with your credit card that costs \$1,000 but repay the \$1,000 before your next statement due date, you won’t pay any interest.

If you don’t pay off the entire \$1,000, however, you will be charged 1/12th of what 25% of \$1,000 would be in one year. Since 25% of \$1,000 equals \$250, this number is then broken down into monthly payments that are tacked on to your bill.

If your minimum payment for your \$1,000 balance is \$10, and you’re being charged 1/12th of your \$250 annual fee, then your credit card bill might look something like this:

• Balance: \$1,000
• Minimum Payment: \$10
• Interest Payment: \$20.83
• Total Payment Owed: \$30.83

Though you might think that you’re paying \$30 towards your \$1,000 balance, you are only putting a \$10 dent into your debt, and the credit card company is pocketing the \$20.83.

Though it might seem unfair, this is how the business of credit works, and in the end, customers pay for the convenience of being able to swipe now and pay later. This is why everyone will warn you about how dangerous it is to slide into credit card debt.

Fortunately, there is a better way to use a credit card to pay for a large purchase over time.

The Case for 0% APR Credit Cards

What if we told you there was a way to borrow this \$1,000 and pay it back over a year or 15 months without being charged astronomical interest? This is where using a credit card with a 0% APR Introductory Period will be a lifesaver.

If you have decent credit and can likely qualify for a credit card offering 12 months of 0% interest, we highly recommend you consider it.

It’s worth applying for a 0% APR credit card if you find yourself in one of these scenarios:

• You have a big purchase, like a washing machine, vacation, or an engagement ring, on the horizon, and you want to pay it off without interest over a year. While you might have money saved up, paying it off over 12-15 months will fold this major expense back into your cash flow in small, manageable monthly payments and let you keep your cash savings as an emergency fund. A credit card with a 0% intro APR promotion on purchases will let you do that.

How Does 0% APR Work?

Being approved for a 0% APR credit card means you won’t have to pay interest on purchases charged to it for some specified amount of time. Most 0% APR credit cards offer this promotion for between 12 and 15 months, but some extend the deal as long as 18 or 21 months.

0% APR credit cards usually apply to both purchases (items you pay for with your card) and balance transfers (high-interest debt you roll over from one account to your new 0% APR card), although some cards may only offer the 0% on one or the other — read the terms carefully! It’s worth noting that cards almost never offer 0% APR for cash advances, which are when you withdraw cash straight from your credit line. These are highly discouraged because they typically come with even higher interest rates and additional fees.

What if I Miss my Minimum Payment on my 0% APR Card?

Though your new 0% APR card will make you feel invincible, remember that you are still engaging in the credit card game. Your 0% offer can be terminated if you violate the terms of your credit card agreement.

The most common way to terminate your credit card offer is by failing to make your minimum payment by its due date. It’s important to remember that even though you won’t be charged interest for up to 21 months, you will still have to make the minimum payments to remain in good standing with your bank.

If you do pay late, exceed your credit limit, or fail to make a payment at all, you may lose your 0% intro APR and the card will start charging you the regular APR.

Taking it one step further, we always recommend you pay more than the minimum payment and calculate your payments based on the total balance divided over the months you have remaining to pay off your bill in full.

Remember, credit card companies have an incentive to keep you in debt – this is part of their business model. That’s why calculating your true monthly payment should always be done to achieve the goal of paying off your debt by the end of your 0% promotional period.

What Happens When the 0% APR Ends?

Once a 0% APR period runs out, the card’s regular ongoing APR will take over.

This means that whatever you have left on your balance will be charged the normal APR, which is usually somewhere  between 14 and 28% on most major credit cards. To avoid paying any interest, make sure that your balance is paid-in-full before the 0% intro period expires.

What Does ‘0% APR for 15 Months’ Mean?

If your new credit card offers a 0% APR for 15 months, this means that for 15 months, you can charge for purchases totaling up to the amount of your credit limit without paying any interest on your balance, even if you don’t pay it off from month to month. (Though, again, you must make at least the minimum payment every month.)

After the 15 months, whatever balance is not paid off will be charged your normal APR, which can be anywhere from 14 to 28% depending on your credit card company and your credit score.

Let’s say that you purchased a new living room set for \$4,000 and paid it off during your promotional period in \$267 monthly payments. By your 14th month, your balance will be around \$267 (good for you!).

But, hypothetically, if you were to forget to pay off the remaining \$267, then once your promotional period is over, you will be charged 1/12th of your normal APR in interest for the remaining balance until it is paid off.

What Credit Score Do I Need For 0% APR?

There are several great credit cards on the market that offer a 0% intro APR for balance transfers and purchases.

Typically, a customer needs a good, great, or excellent credit score to qualify for a 0% APR credit card.

This means that people with 690 credit scores or higher are the most likely to qualify.

David Weliver

David Weliver is the Credit Cards Editor at Millennial Money. He is the Founder of Money Under 30 and is widely regarded as one of the top credit card rewards experts in the world. David has been writing about personal finance and credit cards since 2006 and been featured in The New York Times, NPR, USA Today, Forbes, and many others.

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