Does 0% APR affect credit scores?

Intro APR offers can provide cardholders some much-needed relief from high interest charges. And for responsible cardholders who practice healthy credit habits, they could help you improve your credit score and get you out of debt.

Contrary to popular belief, intro APR offers are not free passes to pay absolutely nothing until the intro period ends. In fact, if you miss a payment, your zero-interest period could abruptly end.

Before applying for a 0 percent APR credit card, it’s important to know exactly how 0 percent APR works and how it affects your credit score, for better or worse. That way you know exactly what you’re getting yourself into when opening up a new credit card account, and how to maximize the intro period before it ends.

How 0% intro APR works

A 0 percent intro APR charges zero interest on a cardholder’s carried over balance for a promotional period, usually of six to 21 months. Once the intro period ends, the regular interest rate is applied. Zero percent APR cards are usually available to customers with strong credit scores. Zero APR offers can be extended to purchases, balance transfers or both, depending on the terms of the card.

Before applying, it’s important to check the card’s terms and conditions to see what the 0 percent APR applies to and how long it lasts. Read the card’s fine print (usually found underneath the box that outlines rates and fees) to understand the details of how you can lose the introductory APR, such as making a late payment. Note that most cards require you to pay at least the minimum payment to maintain the 0 percent APR offer.

How 0% APR affects your credit score

Intro APR offers are meant to help cardholders avoid paying interest and quicken the debt payment process. However, your score may go up or down depending on your payment behavior.

Let’s explore some ways your credit score may be impacted during or after the 0 percent APR period.

Credit score impact before the 0% APR period

Before your intro APR period begins, you must first apply for your 0 percent APR credit card. And like any other card, it’s considered new credit — which calls for a hard inquiry. Your credit score could drop by five points or less, but the impact is temporary.

This new card will also reduce the average age of your accounts, affecting your length of credit history (which makes up 15 percent of your FICO score).

Credit score impact during the 0% APR period

Once you have your card, your credit score could increase as you make payments on time and in full each month. Transferring high-interest balances to your new zero interest card can help you by reducing the overall interest you pay and focusing your monthly payments on the principal amount. If you make regular payments well over the minimum amount, and don’t charge any new purchases on your balance transfer card, you could reduce your credit utilization ratio, which counts for 30 percent of your score.

It’s a common misconception that a zero-interest offer means you don’t have to make any payments until your intro period is up. However, that mentality could cost you. As previously mentioned, you must make at least the minimum payment each month to keep your 0 percent APR. If not, you may forfeit your intro APR offer, and your issuer will regard it as a missed payment. After 30 days of not paying your balance, that missed payment could be reported as a late payment, which will dramatically lower your credit score.

Credit score impact after the 0% APR period

Ideally, you’ll have paid off your entire balance at the end of your intro period. If you keep the card open, you’ll have the card’s credit limit included in your available credit. As long as you don’t make huge purchases on the card, this increase in overall credit will help keep your credit utilization lower.

If you don’t pay off your balance before the promotional period ends, your account will begin accruing interest at your regular APR rate.

As such, it is best to pay off your balance as soon as you can. If not, you may quickly find yourself overwhelmed once again by your debt and its mounting interest charges. Should this cause you to miss a payment, the consequences could negatively affect your score.

What to consider before applying for a 0% APR credit card

If you’re thinking about applying for a card with an introductory 0 percent APR offer, be sure you know what you’re getting into and that it’s the right choice.

• 0 percent intro APR vs. deferred interest. A 0 percent intro APR offers no interest for a time, then will charge interest on your existing balance at your card’s regular APR. Deferred interest offers zero interest for a time, but after that it will charge you interest accumulated from the purchase date if you still have a leftover balance.
• Know how to maximize the 0 percent APR period. An intro APR is most advantageous to your credit if you have a plan in place to completely pay off your balance. If not, you’ll begin to amass interest again and may negate any effect the card had provided initially.
• Your credit limit may be too low for all debts. What if the credit limit on your new balance transfer card is too low for you to transfer all your debts, across multiple cards, onto it? If so, you must have a plan for which balances to transfer and which to leave on their current cards and how to efficiently resolve your debt. Plus, you may not want to transfer too much to your new card since your balances may utilize all the credit.
• Balance transfer fees range from 3 percent to 5 percent. Many balance transfer cards charge balance transfer fees. Depending on how large your debt is and how much in fees you’ll end up paying, it may not be worth it to perform the balance transfer at all.

Bottom line

Zero percent APR cards can be a wonderful tool. They allow you to make large purchases without paying interest, transfer high-interest balances to save on overall interest charges and reach debt payoff goals faster.

However, the key to enjoying the benefits of a 0 percent APR offer is to maintain healthy financial behavior. If you have any doubts about your ability to pay off your balance in full prior to the expiration of the intro period, contemplate alternative ways to pay off your credit card debt.