0% credit cards explained

Whether it’s making larger purchases or transferring existing debt, many people use 0% credit cards as a way to manage their finances. However, like many financial options, they come with drawbacks as well as benefits.

In this guide, we’ll do a deep dive into everything you need to know about 0% credit cards, looking at how you can use them responsibly, as well as offering some alternative options.

What is a 0% credit card?

First things first, you might be wondering what is a 0% credit card? And exactly how does a 0% credit card work?

Well, put simply, a 0% credit card is a credit card with a 0% introductory interest rate which is available for a set period (usually somewhere between 6-21 months).

So, you could make a purchase, and then pay off the amount you’ve spent (over a set period of time) without the burden of interest. Once the 0% offer period ends, standard rates will apply to your card’s remaining balance. But, if you’ve cleared the debt before the end of the pre-agreed period, no extra charges will apply.

How do interest free credit cards work?

So how do interest free credit cards work? And what is the purchase rate on a credit card?

Well, with 0% credit cards, introductory rates usually start from the day your account opens, or the date of your first transaction. And it’s important to highlight that with many providers, the 0% offer only stands with specific card transactions and balance transfers.

Also, you’ll usually receive a warning when the 0% period is coming to an end, so you can prepare accordingly.

Before applying for credit of any kind, you should carry out a credit check from one of the three main credit reference agencies:

• Experian

• Equifax

• TransUnion

Doing so can help you determine your chances of being accepted.

How is the minimum payment calculated on a 0% credit card?

The minimum payment on a 0% credit card is the smallest amount you must pay each month. If you fail to make this payment, a late payment fee may be added to your outstanding balance. Late payments can have adverse effects on your credit rating, so it’s important to consistently meet this minimum payment.

The minimum payment will vary depending on the specific lender plus how much the outstanding amount is. This being said, minimum payments are usually at least 1% of the outstanding balance. So, as the outstanding balance reduces, the minimum payment does so alongside it.

What are the perks of a 0% credit card?

From no interest to spreading out payments and saving on existing debt, 0% credit cards have various benefits…

1. Interest free purchases

As mentioned, the most obvious benefit of a 0% credit card is that they allow you to borrow without paying interest for a certain time period. This is usually dependent on you using your card only for its intended purpose, and paying off your balance before the deal ends.

So, if you’re hoping to make a larger purchase, 0% credit cards provide an opportunity to do so without the worry of interest building up as you make your repayments. Alternatively, some interest-free loans offer a similar option – check out our guide to 0% interest loans for more information.

2. Balance transfers

Some 0% credit cards also allow balance transfers, meaning you can transfer any high-interest debt onto a card with a different provider (which offers 0% interest for a fixed period).

This makes your debt easier to manage and provides you with an opportunity to pay off the money owed without interest building up. Within the promotional 0% period, it’s wise to pay off as much as you can manage. For an in-depth look at how this works, read our guide on credit card balance transfers.

What are the drawbacks of 0% credit cards?

While there are various benefits to a 0% credit card, it’s also important to highlight the drawbacks. The first is that the 0% rate is only temporary. After the agreed period is up, interest rates can accelerate, leaving you with substantial interest to pay on the remaining debt.

Annual or balance transfer charges may also apply when using 0% credit cards, so it’s important you’re fully aware of the terms and conditions before entering into an agreement. For instance, with balance transfers, there are typically fees of around 3-5% of the money transferred.

Finally, if you make a late payment or miss a payment altogether, you may be charged and lose your promotional offer. Plus, this could lead to credit score damage, something which you want to avoid at all costs.

How to use a 0% card responsibly

Now that you’re aware of the potential drawbacks, here are some suggestions for how to use a 0% credit card responsibly.

1. Understand the terms and conditions

You’ll need to ensure you’re fully aware of how you can use your card. For example, if you use your card for purposes that aren’t covered in your introductory rate (such as cash withdrawals), it may increase the amount of interest and fees you pay.

Also, you’ll need to ensure that you’ve planned ahead. Make sure the end date of the 0% period is visible on your calendar, and that you’re aware of when you need to clear the balance by. Consider setting reminders each month to tell you how long you have remaining in the 0% interest period.

2. Create and stick to a budget

Next, in order to ensure you can comfortably meet the repayment deadlines, effective budgeting habits will be a must.

You should calculate how much you’re going to need to pay each month before the 0% offer period ends, then factor this into your monthly budgeting.

If you’re looking for more guidance on this, our guide on effective monthly budgeting tips is a great place to start.

3. Set up automatic payments

Establishing a repayment plan and setting up automatic payments is key when it comes to 0% credit cards. Even with 0% interest, you must still make regular payments, otherwise you could incur fees and risk losing your introductory rate.

So, we’d recommend setting up calendar reminders or a recurring automatic payment.

Making consistent payments can also positively impact your credit rating, so it’s doubly important to commit to this!

4. Avoid maxing out the credit limit

Finally, it goes without saying that you’ll need to avoid maxing out the credit limit. It can be tempting to overspend due to the enticement of a 0% interest rate, but doing so will only cause problems in the future you will have to deal with.

So, regularly check your credit card statement to ensure you’re not nearing the limit.

What are the alternatives to a 0% credit card?

As mentioned, 0% credit cards aren’t the only option out there, so let’s look at a couple of alternatives.

1. Personal loans

You could look into the option of personal loans, which often have fixed interest rates and terms.

These are sometimes used for debt consolidation purposes. For instance, if you have high-interest credit card debt, you may choose to pay it off with a personal loan with lower interest.

Personal loans like our short term loans might also be used to cover unexpected expenses in the absence of an emergency fund.

2. Low APR credit cards

There’s also the option of low APR credit cards; these offer a lower rate of interest (which is fixed and ongoing) rather than a temporary 0% introductory rate. They can help to make your card payments more manageable, and mean you don’t need to worry about clearing your balance before the promotional period ends.

However, if you can’t clear the amount each month, the interest can stack up and become overwhelming, so it’s worth considering which product is right for you.

3. Savings plans

Our final alternative is to put an effective savings plan in place. Then, this can be used in place of the above. Whether you can save a large sum each month or perhaps a few pounds here and there, it all builds up eventually, giving you a pot to dig into when you need it.

We know however how difficult it can be to get started with saving, so we’re here to help. As a starting point, why not dive into our guide: how much can I save in a year? This offers practical tips on how you can save for the near and distant future.

So, there we have it–everything you need to know about 0% credit cards. The temporary alleviation of interest charges provides a handy opportunity; however, like many things, you’ll need to ensure you’re aware of the drawbacks.

If you found these insights helpful, make sure to head over to the Moneyboat blog for plenty more. You can read about the different payment methods in the UK, as well as how to improve your credit rating.

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