What does 0% interest mean?

Interest-free credit cards can be a useful way to spread the cost of major purchases or lower the cost of paying off an existing credit card balance. When you’re shopping around for a new card, an interest-free credit card might understandably catch your eye.

That said, a 0% credit card won’t suit everyone. That’s why it’s important to understand exactly what 0% interest (or 0% APR) actually means before you commit. Such knowledge will help you make sound financial decisions and potentially avoid dealing with higher interest in the long run.

Benefits of an interest-free credit card

There are lots of reasons to consider an interest-free credit card. 

• Large purchases: A 0% APR can make paying for larger purchases much easier because it allows you to space out payments without worrying about paying interest

• Emergency spending: Sometimes things happen. If an appliance breaks or your car needs repairs, for example, having a means to pay could make all the difference

• Existing balances: If a card offers 0% APR on balance transfers, it might be able to help you deal with another credit card balance that’s become difficult to manage

• Rewards: Some credit cards offer rewards and bonuses just for using them

What is 0% APR?

Lenders use the term annual percentage rate, or APR, to describe the true cost of borrowing. It typically combines the interest rate of your borrowing with any fees you might incur, offering a clearer picture of what you need to pay.

Since credit cards don’t usually charge fees directly on everyday spending, 0% APR and 0% interest are basically the same thing. In short, you’re charged no interest or fees on certain kinds of lending.

That doesn’t mean you’re entirely free of fees, though. Although borrowing on the card during the 0% period is free, some 0% interest credit cards come with other fees as standard – for example, some charge an annual fee. Balance transfer cards also typically impose a fee when you make the transfer.

If you’re more interested in avoiding fees than interest, you may wish to review credit cards with no annual fees.

How does 0% interest work?

You’ll see two distinct kinds of 0% deals on credit cards: 0% on purchases and 0% on balance transfers. Sometimes, both apply. These combined 0% balance transfer and purchase credit cards usually compensate for their flexibility by offering a shorter interest-free period. 

Lenders also offer a grace period on purchases, which applies whether you have a 0% APR credit card or not. 

0% purchase credit cards

Cards which offer 0% APR on purchases let you borrow instantly, just like any other credit card, but you don’t have to pay any interest on the things you buy as long as you pay your minimum balance and stay within your credit limit.

Usually, a lender restricts the free period of 0% purchase credit cards to an introductory period. Once this expires, it charges you interest on your purchases and any outstanding balance at a standard APR interest rate. This rate is based on your creditworthiness and is outlined in your card’s terms. 

It’s also worth noting that the 0% rate on an interest-free purchase card applies only to items you buy. Other services your credit card might offer, like cash withdrawals or money transfers, are considered a separate balance on which you must pay an agreed-upon, and usually high, APR.

0% balance transfer credit cards

If you have one or more credit cards with an existing balance, a 0% balance transfer credit card allows you to move the amount you still need to pay onto a card that doesn’t charge interest on that amount for a limited time. 

A 0% balance transfer offer doesn’t just mean free money. You generally have to pay a one-time fee to make the transfer. This is a percentage of the amount you’re transferring that lenders typically add to your remaining balance. That said, certain lenders do offer a no-fee balance transfer credit card if you meet their requirements.

Usually, if a card offers 0% interest on balance transfers, it doesn’t also provide an interest-free rate on purchases, so you must pay the standard APR if you use it to buy things.

Credit card grace periods 

You don’t need a 0% APR credit card if you’re diligent about paying your balance in full. Nearly every credit card includes a grace period on purchases. 

This means that if you pay off your balance before the end of your billing cycle, you won’t have to pay interest. If you don’t pay the full balance (and you’re not in the middle of a 0% introductory period), you have to pay your card’s standard rate.

How to use a 0% credit card

You can use a credit card for everyday spending. In fact, regularly using a credit card can be a good idea if you’re trying to boost your credit score. As long as you can keep up with your payments, it proves to lenders that they can trust you with borrowing.

Remember, though, that a credit card with a 0% APR isn’t a license to spend wildly. Like any form of borrowing, it’s important to treat an interest-free card with respect and control your behaviour to ensure that a useful tool doesn’t become a big problem.

0% credit card dos and don’ts

• Do remember when your introductory period ends so a sudden change in APR doesn’t catch you out

• Don’t forget to pay at least the minimum payment on time because if you make a late payment, your card issuer could both end your introductory period and apply a penalty APR of around 30%

• Do consider whether a 0% balance transfer really works for you – the transfer fee is usually around 3% of the total balance transferred

• Don’t add new debt to a 0% balance transfer card if you can help it 

• Do take full advantage of your zero-interest period and use it to pay down your debt while growing your savings

• Don’t overspend, however tempting it may be, because 0% credit cards are only effective if you can clear them

Read more:

• What happens when your interest-free period ends?

• What happens when you don’t pay the balance of an interest-free card?

• How to use 0% interest credit cards

What is deferred interest?

If you’re using a credit card with a 0% APR introductory offer, the regular interest rate only applies to money left on the balance once the introductory period is over. However, some lenders might offer deferred interest instead. This type of interest can be much more challenging to manage. 

Under a deferred interest deal, you don’t have to pay any interest during the introductory period. Clear your balance, and you won’t pay any interest at all. Fail to clear your balance in time, however, and you will owe interest on everything you’ve borrowed, going back to the purchase date. This is true even if you have very little left to pay off.