true meaning of 0% intro APR?

February 6, 2015 5:59 AM

If I transfer my credit balance to a new card with 0% intro APR, does that theoretically mean I could pay nothing (with no penalties) for as long as the rate stays at 0%? Or am I confused about what it means?
posted by Ain to Work & Money (11 answers total)

You are confused. It just means that 100% of what you pay gets applied to the balance. You'll still have minimums to pay every month.
posted by Ruthless Bunny at 6:03 AM on February 6, 2015 [6 favorites]

No, it means that you won't pay any interest for as long as you have 0% interest. So if you have a balance, you have to pay at least the minimum payment every month.

Be careful with these offers. At some point, the interest rate will go up. If you don't pay off your balance before the 0% interest ends, they will charge you interest for the entire time that you've had a balance (usually 6 months or something). Only get this card if you can pay off the balance before the 0% ends and you won't charge any more to the card. Don't even carry the card in your wallet.
posted by AlisonM at 6:06 AM on February 6, 2015 [9 favorites]

Agreeing with what others have posted and also since you are confused about the APR, just wanted to add -- make sure you are paying attention to any transfer fees as well.
posted by Shadow Boxer at 6:33 AM on February 6, 2015 [4 favorites]

Yes, there is most likely a ~3% balance transfer fee, and yes, you will still have to make minimum payments.
posted by Juliet Banana at 7:02 AM on February 6, 2015 [1 favorite]

If you don't pay the minimum on time, you might lose the promotional rate, in addition to being charged a penalty.
posted by J. Wilson at 7:02 AM on February 6, 2015 [6 favorites]

I've seen clients use these and get out of debt and others just get more mired in debt. There's usually some kind of transfer fee, like 3.8%. So for $10,000.00 of CC debt you are paying $380.00 to transfer the balance. There's often hefty fees if you miss a minimum payment which are easy to forget. They are usually very small minimums like $50.00 a month because the plan is to keep you into the higher rate when the initial period is over. I saw someone get into real trouble after transferring balances around like this for a few years. It became hard to keep track of and the more predatory lenders showed up with offers once the credit pattern had been established.

So do the math. This can be handy if you have a very structured plan to pay off the balance by the end of the 0% period and you have a high interest credit card situation. It may also just be a good impetus to get debt free.
posted by readery at 7:08 AM on February 6, 2015 [2 favorites]

One weird trap that I got into once with one of these things--

Imagine that you get one of these cards. And you transfer $1000. 0% for 12 months, woo-hoo!

The first month you have it, you charge $100. Now your balance is $1100.

However, that 0% APR is only on that $1000-- any NEW PURCHASES could be a high interest rate.

"No problem," you say, "I'll pay off the $100." But then they throw something really weird at you. You are paying off the original $1000, not that new $100.

So now your balance is $1000, but only $900 of it is at 0% for 12 months! It's almost as if you have TWO BALANCES, and you cannot pay off the second balance until you pay off the first! So I basically had 12 months of $100 at a high interest rate-- until I paid off the whole thing!

Now, this was probably 15 years ago, and I know that there have been a lot of new regulations that may have made this sort of practice illegal. Just something to watch for.

If I were doing this again, I wouldn't use the card for ANYTHING else other than just paying off that transferred balance.
posted by gregvr at 7:36 AM on February 6, 2015 [3 favorites]

gregvr's point about low interest balances being paid first is no longer true. Under the CARD act, the highest interest balance is paid first, so you can actually charge on a card with a 0% promo balance and not be stuck accruing interest on the purchase until after the promo balance is paid. However, you will pay some interest unless the offer also includes a temporary 0% purchase rate, as opposed to using a card that is paid in full each month, since you lose the benefit of the grace period.
posted by wierdo at 8:15 AM on February 6, 2015 [5 favorites]

This thread demonstrates one thing above all: Card issuers have quite a number of tricks. That said, it's possible to use a 0% offer wisely.
• calculate the xfer fees over the length of the offer -- that's interest you're paying up front.
• be certain the situation AlisonM describes does not apply. Some cards will apply high interest to the entire balance retroactively, if you miss a payment, and I don't doubt some will do that if you don't pay the balance by a certain date (tho I've never seen one). The more common term is simply that the interest rate goes up, at a certain date, on whatever balance remains.
• never pay more than the minimum, except on your last payment.
• be sure you set a reminder prior to the date the interest flips to high, and can pay the balance by then.

Do all this and you'll end up, by virtue of the xfer fee, borrowing $20k at ~3% for a year. So you'll pay a net of $600 for this loan. Over the year you can invest the $20k:
• to pay off a higher-rate loan
• in a stock, bond, or CD

The question is simply whether you gain enough by either investment to recover your $600 cost and yield anything significantly more. (AND a year from now not watch as your 0% goes up to 27% on a balance you haven't paid down much.)

My experience is that you can do it, but the actual return minus the hassles isn't worth much.
posted by LonnieK at 9:59 AM on February 6, 2015

Another benefit of the CARD Act is that every monthly statement now has to spell out when any promo rates end. One of the tricks of the trade before then was only to state the expiration date when customers took the offer, and after however many months passed, the first reminder was interest showing up on the balance.
posted by holgate at 3:04 PM on February 6, 2015

Be careful also: Some of these deals include a stipulation that your interest rate goes up if you miss one of the monthly minimum payments, so instead of paying 0%, you may end up paying 20%.
posted by yellowcandy at 10:09 PM on February 6, 2015