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Do 0 percent interest credit cards actually exist?

September 10, 2013
Ask Erica
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QDear Erica,

I am looking for a credit card that does not charge interest. I looked on your website, and from what I see, they all charge interest. It is my understanding that some cards do not charge interest. Am I looking in the wrong places? Where are they? – Ashia

AHi Ashia,

Shhh. Don't tell anyone, but pretty much all cards are interest free, if you use them the way you're supposed to. I'll reveal the secret in just a moment.Ask Erica

First, let's start with the type of cards that are often called “0 percent interest cards.” As you seem to have noticed, they don't offer 0 percent interest indefinitely. These cards come with what's called an “introductory period.” During this time, usually several months to a year, you won't be charged interest for purchases or balance transfers (sometimes both), depending on the card. Once that intro period is over, though, you'll be charged interest on any balance you carry from that day on.

So let's move on to how you can avoid interest charges permanently on regular credit cards. To do that, you need to understand a bit about how credit cards work.

As you noticed when you checked out the current offers, financial institutions that issue credit cards set terms for use. Among them is what they will add to balances that are not paid in full by the due date. You probably saw it written as “APR,” which stands for annual percent rate. It's the percent of your balance you'll be charged over the course of the year. The average APR at the time of this writing is around 15 percent. It can go much higher or lower, however, depending on several factors. These include the issuers' own internal policies, as well as your income and credit history.

If the issuer believes that you'll pay back what you borrow per the agreement and have enough money coming in to meet a monthly payment, its lending risk declines. In that case, it will likely reward you with a lower-than-average APR — not 0 percent, but possibly in the single digits.

Now you're probably thinking, “OK Erica, I get it. What about that 0 percent secret you mentioned?”

Read between the lines and you'll find it, Ashia. Credit card issuers won't charge anything at all if you never carry over a balance into the next payment cycle. Therefore, you can use the card at no cost as long you send the bank enough money to cover everything that you spent by a specific date. The time between the day you make the charge and the day that interest kicks in is called the grace period, and every credit card has one. In most cases, you have 30 days to enjoy such a fee-free loan.

But wait: There's a major caveat to that awesome deal. It applies only to goods and services. It doesn't apply to cash advances — most credit cards allow you to extract money from the account, but if you do so, there is no grace period. That means interest starts to be assessed upon withdrawal, and the APR is often higher than it is for purchases. Even worse, you'll be charged an additional origination fee, too.

If you avoid cash advances and pay in full every month, even if you have an account with an APR of 1,000 percent (which doesn't exist, thankfully), not another penny will be added to your bill. In other words — any card you choose can be a 0 percent interest card if you make the right moves.

Using your card this way has another benefit: By charging only what you can pay back and keeping your card balance low, you'll improve your credit — which will put you in a good position to negotiate a lower interest rate. There may come a time when you want to (or need to) pay for something in a few installments — and therefore carry a balance. That's when a great APR will be important, because the lower it is, the less you'll pay in interest fees.

In truth, none of this is confidential — so go forth and spread the good news!

Got a question for Erica? Send her an email.




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