Key takeaways
-
A credit card with an introductory 0 percent APR can help you manage new debt or pay off old balances.
- However, a 0 percent intro APR card can hurt your credit if it causes you to carry a higher balance than usual or if you carry your balance beyond the introductory offer period.
- Applying for a 0 percent intro APR card could temporarily cause your credit score to drop.
There are many good reasons to apply for a zero-interest credit card. The best 0 percent intro APR cards offer between 12 and 21 months of zero interest on purchases, balance transfers, or both, providing plenty of time to pay off balances before the 0 percent intro APR expires. A credit card that features zero interest for a year or more can be an excellent way to fund a large purchase, manage current debt or pay down old balances.
That said, there are ways in which a 0 percent credit card can hurt your credit. If you’re not careful, you could end up with more debt than you started with — and a lower credit score than expected.
How can a zero percent intro APR card hurt your credit? It depends on whether you pay off your balances promptly or let them pile up. Here are five ways a 0 percent intro APR credit card can hurt your credit — and five ways to prevent the damage.
1. Credit score dips when applying for new cards
In most cases, applying for a new credit card means a hard inquiry on your credit, will cause your score to dip — but you won’t lose a lot of credit score points, and the effect is only temporary. Credit scoring services like FICO and VantageScore use the number of hard credit inquiries to gauge whether you’re applying for too much new credit at once. As a good rule of thumb, you should wait at least 90 days since your last credit card application, and you shouldn’t worry about the impact on your credit score.
2. Increasing balance during zero-interest period
Suppose you use the 0 percent intro APR period to run up higher balances than usual. In that case, you might end up with a high credit utilization ratio that hurts your credit score. Remember, even though some rewards credit cards feature solid intro 0 percent APR offers, it’s important to stay focused on paying down your debt during the intro period instead of chasing rewards.
Credit scoring services look carefully at the ratio of your current balances to your available credit, and it’s a good idea to keep your credit utilization ratio below 30 percent whenever possible. This means that if you have $10,000 in available credit across all of your credit cards, you should try to keep your total credit card balance below $3,000. Otherwise, you might find it more challenging to maintain a good credit score.
3. Carrying higher balances after introductory offer expires
Carrying a high balance on a 0 percent intro APR card might cause short-term damage to your credit score — but carrying those balances after the introductory APR expires could create a long-term problem.
Once your zero-interest period ends, any unpaid balances will begin to accrue interest at the card’s regular interest rate. These interest charges become a part of your credit utilization ratio, potentially lowering your credit score month over month — and since credit card interest compounds, it might become even more difficult to pay off your outstanding balances. That’s why paying off as much of your 0 percent APR credit card as you can before the introductory APR expires is a good idea.
4. Trouble making your monthly payments after the introductory APR expires
As your credit card balances increase, your monthly minimum payments also increase.Suppose you’re already having trouble making your credit card payments. In that case, you might find yourself in a situation where you can no longer afford the monthly minimums. You could even wind up missing a credit card payment, which will negatively impact your credit score.
In this situation, the best thing you can do is contact your credit card issuer and ask for help. Your issuer may offer a lower monthly payment or guide you toward a hardship program to help you manage your debts and finances.
5. Defaulting on your debt
If you accumulate high balances, miss multiple monthly payments and can no longer manage your debts, you might end up in credit card default.
Defaulting on your debt is the kind of financial problem that has a lasting negative impact on your credit since the derogatory marks that appear on your credit reports after you default could stay there for as long as seven years. To avoid this, consider seeking debt relief as soon as you find yourself in a position where you can no longer make payments on your credit cards.
The bottom line
Nearly all of the ways an intro 0 percent APR credit card can hurt your credit come down to how you manage your credit card balance; responsibly using this type of card can also provide a helpful financial advantage without the common pitfalls associated with it.
Just be sure to keep your total credit card balance below 30 percent of your available credit and pay off as much of your credit card debt as possible before the introductory APR offer expires.
On the other hand, if you’re unsure whether you’ll be able to pay off your credit card balances on time, you should carefully weigh the pros and cons before applying for a new 0 percent intro APR credit card.
Read the full article here
