What is an intro APR and how does it work?

Some credit cards come with extremely low, or even non-existent, APRs for a limited period of time.

Although the introductory rates will eventually expire, and you’ll be back to paying the regular APR, you can come out ahead financially when you get the right account — and use it wisely.

Here’s how 0 percent APRs work and what you should know before applying.

What is a credit card introductory rate?

An introductory interest rate is an ultra-low, temporary APR. The introductory rate can be just a few percentage points or even 0 percent, and the best intro APR offers extend beyond 12 months, with some cards offering up to 21 months interest-free. These deals are typically offered on newly issued credit cards, so they likely won’t be available on an account you already have (although issuers may occasionally send you special offers on existing cards).

Depending on the credit card, you can have an introductory APR for purchases, balance transfers or both. In any case, while the introductory rate is in effect, you’ll be charged little or no interest on the balance. Once the introductory period is over, you’ll be charged the regular rate.

How does the introductory period work?

The introductory period begins as soon as the account is created. This means that if it comes with a 0 percent APR for 12 months and the credit card was issued to you on Jan. 1, you have until Dec. 31 of the same year to pay off the debt or make charges without adding any financing fees.

This doesn’t mean the introductory rate is guaranteed for the advertised months, however. As a cardholder, you are obligated to treat the account according to the rules set forth by the issuer. That means sending in at least the minimum payments by the due date. If you don’t, the deal will be void and the issuer would then charge you the highest APR.

Benefits of the 0% intro period

There are quite a few perks associated with 0 percent intro periods, including:

Savings

The most obvious advantage of an introductory interest rate — especially when it is 0 percent — is the money it will save you in interest costs.

For example, if you transfer a $6,000 balance from a credit card with a 22 percent APR to a 0 percent APR card with a 12-month introductory period (plus an estimated 3 percent balance transfer fee of $180), the total interest you save would be $760. Subtract the $180 fee and your savings would be $580.

You can also use super-low APR balance transfer deals strategically to get out of debt.

Leverage cash flow

You can open a new credit card with a 0 percent APR and charge a purchase without paying interest and save money by paying off that purchase within the introductory period.

Let’s say you charged $6,000 to a 0 percent APR card with a 12-month introductory period and made monthly payments of $500. It wouldn’t cost you a penny in fees if you paid it off within the year. But if your card has a 22 percent APR and you sent those same payments, the interest would total $840 — and it would take you 14 months to be in the clear.

In fact, using a credit card issuer’s funds interest-free can help you leverage your personal cash flow, which is what Julie Gordon, founder of Inspiring Kitchen, did for her kitchen remodel.

“I was offered 0 percent for 12 months,” Gordon said. “Essentially, it saved me from not having to pull all that money out of savings at once. I had a year to make payments of whatever amount I wanted, knowing that at the 12th month, I would pay off the balance so there were no interest charges.”

Cash back and rewards

An additional advantage is getting an introductory rate card that also has a sign-up bonus. Some issuers give you a certain amount of cash back after spending a fixed amount within a few months of opening an account. Other cards offer sign-up bonuses in the form of points or miles. So a big purchase can net you a large haul of rewards you can use for another big purchase or to book a vacation. Note that you typically can’t earn rewards on balance transfers.

What are the drawbacks of a 0% intro APR offer?

While there are several benefits to getting a 0 percent intro APR credit card, there are also a few drawbacks to consider. For example, the intro period doesn’t last forever. If it only lasts six to 12 months, for example, you’ll have to pay off the balance in a relatively short time or the interest rate will shoot up.

Another potential downside is that you may become complacent about your debt when the interest doesn’t accrue. Avoid the temptation to make only the minimum payment on your balance or to start spending on other credit cards while you’re attempting to get out of debt.

Perhaps the biggest nuisance is that you can forfeit the 0 percent introductory offer if you are late with a payment. Consider setting up automatic payments on your 0 percent APR card or set a reminder on your phone that can notify you a few days before your monthly payment is due.

What to consider before applying for a 0% intro APR offer

There are many factors to weigh before applying for a credit card with an introductory rate:

• Your credit rating: Great offers require good to excellent credit scores, which typically range from 670 to 850. Know what yours are before applying. You don’t want to try for a card only to get rejected, because the hard inquiry may shave some points off your credit scores.
• Length of the offer: The longer you have to repay the debt, whether it’s for a balance transfer or purchases, the better. Timeframes vary dramatically, and even the same card can offer different periods for purchases and balance transfers.
• Credit card type: The card should match your long-term needs and lifestyle. One that allows you to accumulate miles or points is best for people who like to travel, while a cash back card is attractive for general purpose use.
• Regular APR: Eventually the credit card’s introductory interest rate will rise to its regular rate, so bear that in mind. Good APRs are available to people who’ve proved themselves to be low-risk cardholders. To be perceived as such, make your payments on time and keep your balances low.
• Other fees: Look beyond the short-term interest rate benefit, as other fees may be tacked on. If the account has an annual fee, the perks should outweigh that cost. Balance transfer fees are typically 3 percent to 5 percent, so identify the lowest you can get. Traveling out of the country? Look for a card with no foreign transaction fees.

The difference between a 0% intro period and deferred interest

Deferred interest credit cards bear some similarities to introductory 0 percent APR credit cards, but they’re not as advantageous. Interest isn’t added to a balance during the promotional time period with a deferred interest arrangement, but you have to pay the balance in full before the deal expires.

If you don’t, and there’s a debt left over (even a penny), all of the interest you’ve accrued will be added to the balance. So, if you charged $5,000 and have $1,000 remaining, interest will be calculated on the original $5,000 and added to what you owe.

Conversely, with an introductory rate credit card, you’ll only be charged interest on any balance you have left over after the promotional period ends. That means if you charged $5,000 and still owe $1,000 when the introductory rate ends, interest will be applied to that debt only. The $4,000 you already satisfied was an interest-free loan.

Clearly, deferred interest credit cards are riskier than those offering introductory rate APRs. But in both cases, it’s important to manage your financial affairs so you’re out of debt before interest kicks in.

Bottom line

According to credit card expert Jason Steele, 0 percent introductory APR cards are ideal for one-time, big-ticket items — not when you can’t afford to meet your expenses. “They’re great for things like paying for your kids’ summer camp, a car repair or a large medical bill,” Steele said.

Prior to charging with or adding a balance to an introductory rate card, figure out how you will repay the debt within the set time frame. You don’t want to be stuck with a debt with a high rate of interest.

You may have to work some numbers around in your budget to make it happen, but with a well-constructed repayment plan, you can do it. In short, just because you can spread out high debt to the last minute before the true rate kicks in, it doesn’t mean you should, especially if it appears that you’re overextended.