What Does 0% APR Mean? Your Questions Answered

Have you ever received promotional credit card offers from lenders? If so, one of the terms you may have seen on this offer is “0% annual percentage rate (APR).” So, what does 0% APR mean?

0% APR means your lender does not charge interest during a defined introductory period. Though it varies by lender, the introductory period typically lasts between 12 and 18 months. During this time, you will not incur interest on any money you borrow as long as you make your minimum monthly payment.

This article will dive deep into 0% introductory APRs credit card issuers offer. We’ll cover:

• What annual percentage rates are 

• What 0% APR means

• How intro APR offers work

• Whether zero-interest credit cards are a good tool for personal finances

What is an annual percentage rate?

Annual percentage rate, or APR, is a term lenders use to define the cost of borrowing money. When referring to credit cards, the APR is the same as the interest rate. But with other loans, APR can include more than just the interest rate. For example, mortgage APRs will also include points and fees.

The lender defines the APR on a card. A few things, including credit history, determine your APR. Typically, the best credit card interest rates are reserved for those with excellent credit. Rates can fluctuate, but the average as of November 2022 is 19.23%.

To secure new cardholders, credit card companies may extend introductory offers. One of the most common intro offers is a 0% APR. 

What does 0% APR mean? Let’s take a closer look.

What does 0% APR mean?

A 0% APR means you are not charged interest during the introductory period. Your credit card lender defines the intro APR period as typically between 12 and 18 months. During the promotional period, you can’t exceed your credit limit or miss a minimum payment.

However, if you only make the minimum payment, you will incur interest charges on the remaining balance when the intro period ends. After the intro period, your regular APR will kick in. At this point, your lender will begin charging you interest on your outstanding balance, plus any new purchases incurred.

How does introductory APR work?

To understand how introductory APRs work, let’s look at two different examples of a $5,000 purchase. The first example will be based on a standard APR. The second will be based on an introductory APR.

In the first example, let’s say you have a credit card with a regular APR of 20%. You make an initial purchase of $5,000. When your lender issues you a statement, it calls for a minimum payment of $25 due two weeks after the statement is received. 

You make the minimum payment on time, bringing your balance to $4,975. However, because you have a remaining balance, your lender begins charging you interest the day after the due date of your minimum payment. 

Credit card interest compounds, which means you are charged interest on top of interest. Your interest rate is your regular APR of 20%, and your balance will grow quickly if you don’t begin to pay it off.

In our second example, you make the same $5,000 purchase. However, you have a credit card with an intro APR of 0%. The situation plays out the same as above. You receive a statement indicating a minimum payment of $25 due. You make this monthly payment on time to bring your balance to $4,975. 

However, in this scenario, your lender does not charge you interest on your remaining balance. Your balance remains at $4,975. You have until the end of the intro period to pay off this balance before your lender charges you interest.

It’s important to note that in both examples if you miss a minimum payment, your lender will charge you a penalty APR. Penalty APRs are typically higher than standard APRs. 

Additionally, if you have an intro APR offer, missing a minimum payment will nullify the offer. You will be charged a penalty APR for the missed payment and then a standard APR moving forward.

Are intro APR credit cards a good option?

Intro APR credit cards could be a useful option when managing your personal finances, as long as you have a plan in place to pay off your entire balance by the time the intro period ends.

For instance, let’s say that you need to make a large purchase, and you don’t have cash readily available in an emergency fund. Instead of taking out a personal loan, you could put the purchase on a 0% credit card. Then, you can plan to pay off the balance during the period of time outlined in your introductory offer. By doing so, you’ll need to pay off only the principal. Your payments are interest-free.

For example, let’s say that you need to make a $9,000 purchase. You apply for and receive an intro APR credit card with a 0% APR for the first 18 months. You put together a budget for the next 18 months and commit to paying $500 per month during that time. By the time your intro period ends, you will have paid off the large purchase in full without paying interest.

It’s worth noting that an intro APR credit card will impact your credit report. When you first apply for the card, your lender will need to perform an inquiry, which may result in a slight dip in your credit score.

However, if you make your minimum payments — or greater than a minimum payment — by the due date, you may begin to build good credit. Not only could your credit score improve by making on-time payments, demonstrating that you are responsible with borrowed money, but because you are reducing your credit utilization rate.

0% APR can be a useful option, if used correctly

Every now and then, you may receive a letter in the mail from a credit card company offering a “limited-time, zero-interest offer.” This is otherwise known as a 0% APR offer. Intro APR cards have a defined period of time in which a lender won’t charge interest, as long as you make the minimum payment by the due date each month.

Credit cards with 0% APR offers could be useful if you manage them correctly. These cards can allow you to make large purchases and pay them off over time. 

However, before applying for one of these cards and making a large purchase, you’ll want to make sure that you have a plan in place to pay off the balance by the time the intro period ends. Otherwise, you’ll be charged interest at your standard APR, which could push as high as 20% or more, and you could struggle to get out of credit card debt.

If you’re currently dealing with credit card debt, give Tally† a try. Tally is a credit card payoff app designed specifically to help you pay down higher-interest debt quickly and efficiently with a lower-interest line of credit.

†To get the benefits of a Tally line of credit, you must qualify for and accept a Tally line of credit. The APR (which is the same as your interest rate) will be between 7.90% and 29.99% per year and will be based on your credit history. The APR will vary with the market based on the Prime Rate. Annual fees range from $0 - $300.