How Does an Introductory APR Work?
You know you're supposed to pay off your entire credit card balance every month. But that's not always possible. Whether you have credit card debt built up that's costing you interest each month or you plan to make a big-ticket purchase you can't afford to pay off right away, an introductory APR can help you save money.
[Read: Best 0% APR Credit Cards.]
What Is An Introductory APR?
Credit card companies will sometimes offer an introductory APR to those who open a new card. In many cases, the introductory APR is 0%.
"You will not have to pay interest on any charges within this time frame, even if you carry a balance from month to month," says James Lambridis, founder and CEO of Debt MD, a financial technology startup that links people with credit counselors, debt settlement companies and debt consolidation loan companies.
Usually, the introductory period lasts between 12 and 18 months. Once the introductory APR period is up, the interest rate will revert to the standard APR you agreed to in your card agreement. That means if you still have a balance at the end of the introductory period, it will begin accruing interest at the normal rate, even if you were charged no interest on it previously. However, you won't be charged interest retroactively for any purchases originally made during the introductory period.
Ivan Chong, founder of the personal finance blog Lazy Finances, says, "Introductory APRs are one of the best deals outside of cash back that credit card companies offer." Considering that credit card interest rates are typically between about 17% and 24%, according to U.S. News research, "you can save thousands of dollars if you plan on making a big purchase or carrying a balance for a significant period of time," he says.
One important thing to keep in mind is that the introductory APR only applies to purchases, unless otherwise noted in the terms and conditions. That means if you take out a cash advance, you'll be charged the corresponding APR, even if it's during your introductory period. The same is true of balance transfers, unless your card has an introductory APR for balance transfers.
If you're not sure how the interest rate works on your credit card, you can always check the Schumer box. This is a table found within your credit card agreement that details all the card's rates, terms and fees, as required by the Truth in Lending Act. Here, you can see the APR for purchases, including the introductory APR and how long it lasts, as well as other types of APRs for cash advances, balance transfers and penalties.
Another thing to keep in mind is that the introductory period isn't completely set in stone. If you violate the terms and conditions of your credit card agreement, your card issuer might cancel it.
"Reading through the fine print is necessary," Chong says, since terms vary by credit card company and by the specific offer. "You can lose the introductory APR if you have late payments, go over your credit limit or a payment is returned."
[Read: Best Low-Interest Credit Cards.]
Don't Confuse 0% APR With Deferred Interest
Similar to cards that offer a 0% APR for a limited time, some no-interest credit cards offer what's called deferred interest. It might sound the same, but you can end up paying a hefty amount of interest on a deferred-interest card.
With a credit card that charges a 0% APR, you can carry a balance every month during the interest period and not be charged a dime, as long as you make the minimum payments on time.
With a deferred-interest card, on the other hand, interest is still calculated every day you have a balance -- you just don't pay it right away. If you manage to pay off the entire balance before the deferred interest period is up, you're in the clear. But if there's any balance left, you're retroactively charged all the interest that accrued over the deferred period. That's the case whether you owe $1 or $100. Usually, retail credit cards and medical credit cards offer this type of deal.
"When entering into one of these agreements, it is imperative you pay off the balance before the end of the promotional period or else you may very well end up paying double the price on your purchase," Lambridis says.
How to Get Introductory APR Offers
So how do you actually get your hands on a card with an introductory APR? There are a few ways to go about it.
Check for new offers. The most common way to obtain an introductory APR is by opening a new credit card account. Usually, you need to have good credit to get approved for these deals, in addition to meeting other eligibility requirements, such as income.
Transfer a balance. Some card issuers won't offer an introductory APR on new purchases, but they will on balance transfers. Balance transfer credit cards allow customers to move an existing balance from a competitor to a new card. They charge low or no interest on the transferred balance for a set period of time.
Keep in mind that balance transfers usually require a fee of 3% to 5% of the amount transferred. If you're transferring high-interest debt from one card to another that offers a 0% APR, that fee is usually worth it. However, it's always a good idea to run the numbers ahead of time so you're sure you're coming out ahead.
Ask your issuer. Though it's common to score an introductory APR through a new card offer, it's also possible to negotiate one with your current issuer. Do some research to find competing offers and ask your issuer to match or beat the offers to retain your business.
[Read: Best Balance Transfer Credit Cards.]
Making the Most of Your Introductory APR
If you secure a credit card that comes with an introductory APR, you'll want to make sure you maximize the savings of your low-interest period. Here's what you can do to make the most of your introductory APR.
Pay every bill on time. When it comes to credit cards, the most important thing to do is make at least the minimum payments on time. Not only will this ensure you avoid late fees and maintain good credit, but in the case of an introductory APR, you'll avoid losing it early by violating your card's terms.
Pay off the balance before the introductory period is up. You may not receive a reminder from your credit card issuer that the introductory period is expiring. If you failed to pay off the balance, it'll start accruing interest. Do your best to pay down your debt while the introductory APR is still in effect. It's a good idea to set a few calendar reminders so you don't forget the deadline.
Watch out for fees. An introductory APR is only helpful if your savings isn't eaten up by fees. Before you jump on an offer, make sure that card doesn't also charge an annual fee, which could outweigh the interest savings. Other fees, such as late fees or cash advance fees, could also wipe out interest savings.
Keep your credit utilization low. The amount you carry on your card month to month accounts for 30% of your credit score. So even if you're saving money on interest during the introductory APR period, you could be damaging your credit score by carrying too high of a balance. That can cost you money in the long run. Aim to keep your card balance as low as possible -- ideally, under 30% of your credit limit. If you do need to charge a high amount one month, consider making a couple of payments throughout the month to keep the balance down.
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