What does 0% APR mean for credit cards?
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Many entrepreneurs and small businesses use business credit cards to manage and track business expenses and accounts payable. If they carry balances, the cost of doing this is going up fast.
The average business credit card interest rate has risen rapidly in the past year as card issuers have responded to the Federal Reserve and other central banks’ attempts to rein in inflation with interest rate increases. The average rate for business cards in September was 19.44%, up over two percentage points year over year, the biggest increase of any card category except for secured cards.
In this environment, it can make sense to investigate 0% Annual Percentage Rate (0% APR) cards, which provide an interest-free initial promotional period for purchases and transfers from other credit cards.
What does 0% APR mean?
The annual percentage rate is the yearly interest you pay on a card. A 0% APR offer means that the card, or in some cases a loan, charges no interest for an introductory period on purchases, balance transfers, or both. However, although no payments are required during the introductory period, interest charges will begin to accrue after that period ends, and these can be substantial.
What is a 0% APR credit card?
A 0% APR credit card charges you no interest for a specific amount of time, usually between 12 and 20 months. This does not mean you do not need to make payments during that period. You must still pay down the balance in regular monthly intervals. This payment is usually around 2-3% of the outstanding balance. However, your balance does not grow due to additional interest accruing against it.
It is particularly important to make your payments on time, because a late or missed usually triggers an end to the 0% APR period, and you start being charged the normal variable interest rate on the balance. This can be from 15% to 21% on business credit card offers for individuals with good credit, and that figure is likely to continue to rise as central bankers raise interest rates to combat inflation.
How do 0% APR credit cards work?
The 0% APR rate applies to one or both of the following:
- Purchases. New purchases made during the introductory 12 to 20 months are not charged interest. This is useful for individuals or small businesses that need to finance a large expenditure, but which expect to be able to pay it off during the introductory period.
- Balance transfers. Individuals and businesses can transfer balances from high interest rate credit cards to a new 0% APR card and, by eliminating the interest charge during the introductory period of time, they are able to pay those balances down more rapidly.
A business founder who needs to finance one or more large upfront purchases to establish or expand a company could find a 0% APR card useful, as long as that he or she expects the purchase to generate enough revenue to pay down the balance before the introductory period ends. This requires some careful financial planning.
For example, a retail entrepreneur who needs to order $20,000 worth of inventory to stock a new store would have to pay an additional $3,888 in interest for one year using a card with the average business card rate of 19.44%. If the entrepreneur uses a 0% APR corporate card with a 12-month introductory rate and is able to pay off the entire amount during the introductory period, that is a big savings. To do so would involve paying $1,667 per month, which is $20,000 divided by 12 months.
However, if the entrepreneur only pays the 2% minimum on the card during the introductory period, he or she will still have nearly $16,000 outstanding at the end of 12 months, which would then be subject to the 19.44% interest rate.
Clearly, it is in the business owner’s best interest to pay more than the minimum, to avoid being saddled with that amount of debt at nearly 20% interest. He or she will have only saved about $775 in interest expense ($3,985 times 19.44%).
Balance transfers can yield even more profound savings. If that entrepreneur already has $20,000 of debt on a card that charges the current average interest rate, he or she can use a balance transfer offer to eliminate $3,888 in interest expense over a one-year introductory period.
0% APR does not mean 0 interest
As noted above, it is important to know when your introductory 0% APR deal will end so you can plan to have the balance paid off – or paid down to a manageable level. Once the 12-to-20-month APR period ends, the card will switch to a variable interest rate which, depending on your credit score, can be painfully high.
You should consider three other factors when determining which card results in the most savings:
- Credit card issuers often charge a balance transfer fee, which can be as high as 5%.
- You will not typically know what your credit limit will be when you apply for one of these cards.
- Some cards charge an annual fee, which the cardholder should consider when determining which deal is most advantageous.
- Finally, a card’s 0% promotional period for purchases is often different, and shorter, than the promotional period for balance transfer credit cards. This should be kept in mind to avoid finding yourself paying interest at a high variable rate on purchases by accident.
These cards also affect your credit score. The credit card issuer will pull your credit record when you apply, which causes your score to fall slightly. It should recover rapidly, though. However, if the amount you charge, as a percentage of your total credit capacity – what is called your credit utilization number – goes up significantly, it will harm your credit rating. A credit utilization figure under 30% is considered best for maintaining a healthy credit rating.
Finally, some cards mix 0% APRs on new purchases and transfers with various types of rewards, such as airline miles. However, the rewards on transfers are not usually significant enough to warrant making them a significant factor in your choice of card.
What happens when 0% APR ends?
This is an important question, and one you need to understand before signing up for one of these cards. Normal 0% APR cards start charging interest when the promotional period ends on the remaining balance. They can also begin charging interest If you miss or are late with a payment.
There is another type – the deferred APR card – that is less forgiving. These cards accrue interest during the entire promotional period, and if you do not pay them off in full, they bill you for it when the introductory period ends. These are mostly store cards issued by retailers, and are usually easy to spot and avoid.
Understand the card issuer’s motives
The credit card companies that issue these cards, and encourage you to transfer balances from other lenders, are not in the business of giving away free money. It is important to recognize their motives.
- First, they have crunched the numbers and know from historical experience across business cycles that enough borrowers will either miss a payment, triggering the imposition of often-punishing variable interest rates, or will fail to pay the credit card debt off by the end of the intro period, leaving the card issuer with a lucrative source of interest revenue.
- Second, the fees they often charge help defer losses on those accounts that do pay off their entire balances in time.
- Third, they charge transaction fees, called interchange fees, to vendors every time someone uses their card, further eroding any losses on accounts that are paid off in time.
- Fourth, the net interest margins banks garner – which is the difference between banks’ low single-digit borrowing costs and the eye-popping rates they charge borrowers – are so lucrative that any marketing ploy that brings in new clients is considered a win.
The benefits of 0% APR credit cards
The main benefit of 0% APR cards for purchases or transfers is a reduction in interest rate costs. Firms such as Bankrate provide online tools that help you determine how much you can save under different scenarios, such as different post-introduction-period interest rates and the minimum payments you decide to make.
How to use a 0% APR credit card as an interest-free (business) loan
If you plan to invest the proceeds of the debt you take on with a 0% APR credit card in revenue-producing opportunities that will generate enough cash flow to pay the card off within the introductory period, the transaction becomes, essentially, an interest-free business loan.
Divide the amount you borrow by the number of months in the introductory period and ensure you can pay that amount each month. In the example above, paying $1,667 each month on a $20,000 credit card balance with a 12-month 0% introductory offer rate and a 19.44% variable apr rate thereafter saves the entrepreneur a minimum of $3,888 in interest expense on the initial borrowing.
Remember these important caveats:
- Late or missed payments usually trigger an end to the 0% APR promotional rate, so you need to be confident that your use of the proceeds from the borrowing will generate enough revenue to cover the monthly payments, or that your other resources are adequate to do so.
- Scrutinize the card agreement to ensure you understand all fees, including annual fees and balance transfer fees, which can be significant.
- Borrowing more than 30% of your credit utilization figure – that is, more than 30% of all the credit you have at your disposal – will damage your credit rating. So, to charge $20,000 without hurting your credit would require about $67,000 in credit capacity among all your cards and other sources of debt financing.
Canny users of 0% APR cards can avoid the twin risks of triggering the variable rate and breaching the credit utilization ceiling by daisy-chaining balance transfer offers before the end of their introductory periods. Remember to always pay one card off with the proceeds from another, or your business could find itself flirting with poor financial performance or even insolvency.
How to qualify for a 0% APR credit card
These cards are available only to those individuals with good credit or excellent credit – that is, a FICO score of 670 or higher. The card issuers are, after all, taking a bigger market risk in terms of the potential revenue from these products, which they try to offset by taking less credit risk by issuing only to qualifying borrowers with strong credit histories.
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No, the lender’s variable interest rate – which for business cards is now averaging 19.44% - will kick in if the card user misses or is late with a payment, and at the end of the introductory promotional period, which usually lasts 12 to 20 months.
The Annual Percentage Rate is the interest charged on the credit card each year. A 0% introductory APR means the card issuer waives interest for a given introductory period as a promotional tool to get customers to use its card.
Getting a card requires the potential card issuer to make a “hard pull” of your credit report, which usually lowers your credit score slightly, although it usually soon recovers. However, increasing your borrowings to a level above 30% of your total credit availability will damage your credit score, so taking out a 0% APR card with a high limit, and borrowing up to that limit, is generally bad for your credit score.