Should I Open an Interest-Free Credit Card?

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Q: I’m constantly getting offers for interest-free credit cards and I’m really tempted to sign up. Is this an advisable thing to do?

A: Interest-free credit cards, often referred to as 0% APR cards, can be highly attractive to consumers who are looking to improve their financial health. However, these cards can also be a debt trap for the less-informed.

Let’s take a closer look at interest-free credit cards and explore whether it can be a good idea to open one.

What is an interest-free credit card?

As its name implies, an interest-free credit card will offer the owner a line of credit that can be paid back without interest. The catch here is that this feature applies only for a limited introductory period. Once this ends, your credit card balance will be hit with interest charges.

What are some reasons to open an interest-free credit card?

An interest-free credit card can be useful in the following circumstances:

Cost savings. An interest-free credit card can enable you to make large purchases you can’t pay for on the spot. If you can pay off the balance before the introductory period ends, you’ll enjoy significant savings on a credit card purchase that typically has interest charges.

Balance transfers. Many 0% APR cards offer interest-free balance transfers. This allows you to move high-interest debt to the new card and pay it off without accruing additional interest, which can help you get out of debt faster.

Financial breathing room. If you’re struggling to get through the month, but you anticipate improvement in your financial situation soon, an interest-free credit card can be a good idea.

What are some of the drawbacks of interest-free credit cards?

Interest-free credit cards do have disadvantages, including the following:

Limited introductory period. The interest-free period on 0% APR cards typically lasts between 6 and 21 months. After this period, the APR will increase significantly, often to higher than average rates, leading to costly interest charges if you still carry a balance.
Potential for debt accumulation. The allure of interest-free purchases can lead to spending more than you can really afford. Without the immediate consequence of interest charges, you may find yourself accumulating more debt than you can comfortably pay off within the introductory period.
Balance-transfer fees. While transferring balances can save on interest, many cards charge a fee for this service, typically around 3-5% of the amount transferred. These fees can add up and will offset some of the interest savings that might be motivating your choice of the card in the first place.
Impact on credit score. Opening a new credit card can affect your credit score. If the new card increases your total available credit, it might lower your credit utilization ratio, potentially boosting your score. However, a hard inquiry from the application process and any increase in debt could have a negative impact.

Is an interest-free credit card right for me?

If you’re thinking about opening a 0% APR card, first ask yourself these questions:

What is my current financial situation?

Consider factors like your monthly income, debt load, savings and more. Are you paying your bills on time? Are you debt-free, or on target to pay off your outstanding debt soon? If you have a large amount of high-interest debt, a balance transfer to an interest-free credit card can be beneficial, but only if you pay your bills on time and anticipate paying off your balance before the grace period ends.

What are the terms and conditions of the card?

Don’t sign up for a new credit card before you understand its terms and conditions. What kind of interest rate can you expect after the introductory period ends? Are there fees attached to the card? Once you have this info, ensure you’re getting the interest-free card with the best terms and conditions on the market.

Will I be able to resist the temptation to overspend?

If you’re a chronic overspender and you think additional credit will only trigger you to spend more, a new credit card may not be for you — even with an interest-free period.

Is there a better option for me?

Whether you’re opening your interest-free card to fund a large purchase or to transfer high-interest debt, there may be an alternative that better meets your needs. Here are two options to consider:

Personal Loans-this low-interest, unsecured loan will give you a longer (and fixed) repayment period. It generally has easy eligibility requirements within your own financial institution.
Home Equity Lines of Credit (HELOC) or Home Equity Loan-if you are a homeowner, these products that are secured by your home can give you the funds you need at a fairly low interest rate and with generous payback terms.

Interest-free credit cards can offer substantial benefits, but they do come with risks. Use our guide to learn about the pros and cons of these credit cards so you can decide if opening one is truly in your best interests.