How Does 0% APR Work?

By David

As credit card companies have grown more skilled at coming up with incentives to make us want their card rather than another, a newer idea has emerged that might have you a little confused. We are talking about the idea of an introductory 0% APR. So how does 0% APR work?

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Introductory Offers

To answer the question “how does 0% APR work?” we must first take a look at what an introductory offer is and how it functions. Basically an introductory offer is any additional perk or feature on your credit card that expires after a certain amount of time owning the card. So if you see any features listed on your card with a time limit attached to them, you can be sure that those are introductory offers.

APR (Annual Percentage Rate)

In answering the question “how does 0% APR work?” it is helpful to first know what APR is and how it works. Your credit cards APR is the amount of interest that is going to be charged on your cards balance over the course of an entire year. Despite this being an annual metric, interest is actually applied to your cards balance on a daily basis after it has been on there more than 30 days. This first 30 days is called your grace period and is the best opportunity to avoid interest when using credit cards. Once interest starts being applied, it is added to your balance and then in turn earns interest of its own. So if you had a credit card with $100,000 balance and an APR of 15% on day 31 or maintaining that balance you would be charged $40 in interest.

This would then be added to your balance bringing it up to $100,040. On day 32 you’d be charged $40.02, $40 for the original $100,000 balance and $0.02 for the previous day’s interest, and it keeps going from there. This is called compound interest and is one of the reasons it can be tough to get out of credit card debt if you borrow responsibly.

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0% APR

Now that we understand introductory offers and how APR works, we can answer the question “how does 0% APR work?” 0% APR basically means that for as long as the introductory offer lasts (typically anywhere from the first few months to an entire year) the balance on your card can be maintained past the grace period interest free. It will still go through the interest calculations, but as you know 0 or 0.00 as it would be represented in the equation multiplied by anything is always 0. So regardless of how large the balance, there won’t be any interest during the introductory period. While this is a nice perk, it is typically employed to offset the fact that the APR will eventually be higher than is average for a card of the same type, making these offers poor choices in the long run.

Now you know how 0% APR works and how to avoid the pitfalls that such offers are meant to hide.

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