Balance transfer vs. 0% APR

Are you eager to pay off your debt as quickly as possible or looking for a simple financing option? The 0 percent APR card is one of the best weapons in the credit card arsenal — if used wisely.

First things first, what is the difference between 0 percent APR and balance transfers? We know it’s confusing, but it’s important to understand how each works and what is the best option for your financial situation.

A 0 percent APR offer can be a great way to pay off expensive purchases or manage high-interest debt, but be sure to understand the offer and its limits and fees before taking advantage of it. Paying off your balance before the promotional period ends is key to getting the most out of the offer.

0% APR on balance transfers vs. purchases

On most unsecured credit cards, a carried over balance is charged an ongoing, variable APR until you completely pay that balance, plus interest. Zero percent intro APR offers apply zero interest on a card’s balances, whether transferred or amassed through new purchases, for a promotional period.

While a 0 percent APR on new purchases can be beneficial if you’re planning to make an expensive purchase, a promotional APR on a balance transfer can help you pay off debt faster.

When shopping for a 0 percent APR card, be sure to read the card’s terms and conditions thoroughly to know if the zero interest applies to balance transfers, new purchases or both.

How does 0% APR on balance transfers work?

A balance transfer simply moves your existing balance from one card to another card, usually between different issuers. A balance transfer can help manage debts from other cards, typically those with high interest rates, by transferring them to a card with a 0 percent APR for a promotional period. The 0 percent intro APR usually lasts between six and 18 months, though some cards out there offer it for up to 21 months. Keep in mind that balance transfers are not free. They’re often accompanied by balance transfer fees, conditions to maintain the intro APR and limits on the amount that can be transferred.

How does 0 percent APR on new purchases work?

Intro APR offers can also apply to new purchases made with the credit card and allow cardholders to not pay any interest on that purchase for the duration of the offer, usually from six to 18 months.

Keep in mind: Intro APR offers are different from deferred interest offers. With deferred interest, interest accrues during the promotional period but it is suspended until the intro period ends. If the balance is still not paid off by then, all the interest accumulated from the purchase date is charged. Compare that to a 0 percent intro APR offer, where interest will not accrue during the promotional period, and it will only charge interest on the current balance at the end of the intro period.

Should you get a 0 percent APR on balance transfers?

A balance transfer is a great method for debt consolidation, especially if you have outstanding balances on multiple cards. Balance transfers can help you pay off debt faster and save money on interest, but should be used with caution. They’re best if you have good financial behaviors in place. If not, you may be tempted into racking up another looming balance on your existing card.

Let’s explore an example. Say you, the cardholder, have a $5,000 balance on a credit card with an APR of 19 percent. If you transfer that balance to a new card with a 0 percent APR for 18 months and an intro balance transfer fee of 3 percent and pay $350 a month, you could pay off your entire balance in 15 months and save almost $520 in interest and fees. (Find out how much you could save using our Balance Transfer Calculator.)

Before applying for a balance transfer card, take the following into account:

• Balance transfer cards often require good credit. Those with less than perfect credit scores may find it difficult to qualify for a 0 percent APR offer. Consider some other debt consolidation methods as well.
• Balance transfer fees can go up to 5 percent per transfer. If your transferred balance is so large that your balance transfer fees eat into how much you’d save on interest, think carefully before you sign up for a balance transfer card. Doing the math should help clarify your next step.
• A missed payment could void the benefits. Many balance transfer cards offer 0 percent APR for a time on the condition that you pay the minimum amount monthly. If not, you could forfeit your zero interest and any intro fees, as well as subject yourself to a late fee and penalty APR.
• You may unintentionally void your grace period on purchases. Since a 0 percent APR on balance transfers makes it easier to carry balances, you may lose your grace period on any new purchases made with the card. Even when you use the card to buy a small coffee, the purchase will be charged interest from day one.
• Some cards have transfer limits. Even if you’ve decided you’re ready to transfer all your balances to a card, you may not be allowed to. If your assigned credit limit is too low, what will you do with your remaining debt? And unfortunately, some cards have limits on the amount you can transfer, either depending on your credit score or the issuer’s policy — another obstacle you must account for.

Should you get a 0 percent APR on new purchases?

When deciding whether to apply for a 0 percent APR offer for new purchases, it comes down to your credit habits and whether it makes good financial sense. Zero percent intro APR offers on purchases are ideal for those who usually pay their balances in full and on time every month. If you need a period of zero interest to provide your household with some extra cash — in the case of sudden financial instability like job loss or a medical emergency — such offers should give you that extra time to figure out your new budget.

Zero percent intro APR on purchases is not for anyone trying to run away from their existing debt by opening up new cards and spending on them. Your other debts will only continue to accrue interest and haunt you.

Before applying for a 0 percent APR card, be sure to understand the offer, what it applies to and how you’ll pay that balance and make on-time payments every month to avoid losing it.

Consider the following tips when shopping for and using your 0 percent APR card:

• Know the duration of your intro period. If a card offers 0 percent APR on both purchases and balance transfers, it is not guaranteed it will be for the same amount of time. Sometimes the no-interest period lasts longer on balance transfers than it does on purchases.
• Set a calendar reminder for when the promotional period ends. Be sure to set a repayment schedule that is aggressive enough to pay off your balance within the intro period, to avoid any interest charges. Setting a reminder for the end date will also ensure you maximize your 0 percent APR card.
• Missed payments can eliminate your intro APR. Like balance transfer offers, your issuer could end your intro APR period immediately when you miss a payment. A 0 percent APR offer does not mean you don’t have to pay anything during the intro period — you must still pay the monthly minimum.

How high balances can affect your credit score

Though balance transfers and 0 percent APR offers can be good for your credit by helping you pay down debt, there are still a few ways they can hurt it.

Having more accessible credit could be good, but if your balance transfers or purchases take up a large percentage of your credit lines, your credit utilization could go up. Since your credit utilization ratio makes up 30 percent of your FICO score, it’s crucial to keep it low. Some recommend keeping your ratio around 30 percent — but really, the lower the better.

If you diligently pay down the balance on your new 0 percent APR or balance transfer card while keeping other card balances low, your credit score will likely improve.

Bottom line

A zero percent APR offer can be beneficial as long as you understand the ins and outs of your card and can pay off your balance before the promotional period ends.

Regardless of whether you choose to get a card with 0 percent APR on balance transfers or purchases (or both), understanding how your card works and the benefits it offers can help you save on interest, pay off debt and improve your credit.